GP or Gross Profit is the excess of sales over cost of goods sold. Cost of goods sold means the cost incurred by the company in producing the goods sold. This simply implies that it does not consider the cost of goods that are still in stock of the company. This gross profit calculator is for simplifying these calculations.
Gross profit is the earnings made by the company at the gross level. For instance, a company producing and selling pencils would arrive at a gross profit by deducting the cost of material used in it, wages paid, expenses for producing goods from its sales. However, it will not consider the administrative and marketing costs. GP only includes costs spent till the production stage.
Gross Profit Margin
GP Margin is the percentage of gross profit on sales.
The formula to calculate the gross profit is as follows:
Gross Profit = Sales – Cost of Goods Sold
Cost of Goods Sold (COGS) = Opening Stock + Purchase + Direct Expenses – Closing Stock
And, the formula for calculating gross profit margin is:
Gross Profit Margin = (Gross Profit/Sales) * 100
How to Calculate Using Calculator?
Enter the following figures into the gross profit ratio calculator to arrive at gross profit and gross profit margin.
Here sales mean net sales. Net sales mean cash plus credit sales less sales returns if any.
Opening stock means stock available at the beginning of the year
Enter the amount of purchases made by the company during the year.
Provide the amount of direct expenses into the calculator.
It refers to the stock of goods available with the company at the end of the yea. Or at the close of the period for which these calculations are happening.
Assume a company has recorded sales of $500,000 and its purchases amount to $390,000. The opening and closing stock of the company stands at $40,000 and $50,000 respectively.
Cost of Goods Sold = 40,000 + 390,000 – 50,000 =380,000
Gross Profit = 500,000 – 380,000 = 120,000
Gross Profit Margin = (120,000 / 500,000)*100 = 24%
A stable or consistently increasing gross profit margin helps in determining the improvement in the efficiency of company. It should be compared with GP margin of previous year as well the GP margin of companies operating in the same industry.
But, the actual efficiency in the functioning of the company cannot be determined using this solely. Because it does not consider various other costs such as cost of advertisement, admin costs, etc. which the company incurs for selling its products.