How to Calculate Gross Profit and Gross Profit Margin - Softotech

How to Calculate Gross Profit and Gross Profit Margin

Gross profit is what is left from sales after the direct cost of making or buying what you sold. Here is the formula and a worked example.

The formulas

  • Gross profit = revenue – cost of goods sold (COGS)
  • Gross profit margin = gross profit / revenue x 100

Worked example

A shop sells $50,000 of products that cost it $30,000 to buy.

ItemCalculationResult
Gross profit50,000 – 30,000$20,000
Gross profit margin20,000 / 50,00040%
Markup on cost20,000 / 30,00066.7%

Margin and markup are not the same. Margin is measured against revenue, markup against cost. A 66.7% markup gives a 40% margin. See how to price service jobs for using both.

What counts as COGS?

  • Products: purchase price, freight in, packaging used in the product.
  • Services: direct labor and materials for the job.

Rent, marketing, software and office wages are usually operating expenses, not COGS. They come off later, between gross profit and net profit.

Gross profit vs net profit

Gross profit ignores overhead. Net profit subtracts all expenses, interest and tax. A business can have a healthy gross margin and still lose money if overhead is too high.

In Excel

With revenue in B2 and COGS in B3: gross profit =B2-B3, margin =(B2-B3)/B2 formatted as a percentage.

Use the calculators

Try the gross profit calculator and the gross margin calculator to check your numbers.

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    Frequently asked questions

    What is a good gross profit margin?

    It depends on the industry. Software can run very high, retail and restaurants are much lower. Compare with similar businesses.

    Is gross profit the same as gross margin?

    Gross profit is a dollar amount. Gross margin is that amount as a percentage of revenue.

    How do I calculate gross profit per unit?

    Subtract the unit cost from the unit price. A $25 item that costs $15 has $10 gross profit per unit.

    Does gross profit include taxes?

    No. Taxes and overhead are subtracted after gross profit.

    Need help with your numbers or a custom spreadsheet?

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