Gross profit is a financial metric that represents the amount of revenue that remains after deducting the cost of goods sold (COGS) or cost of sales from a company's total revenue. It measures the profitability of a company's core business operations before taking into account other expenses such as selling, general and administrative expenses, interest, taxes, and depreciation.
Gross profit is an important metric for investors and analysts, as it provides insight into a company's ability to generate profits from its primary business activities. It can be used to compare a company's profitability over time, as well as to compare its performance to other companies within the same industry.
The formula for calculating gross profit is:
Gross Profit = Total Revenue - Cost of Goods Sold (COGS)
Company XYZ sells t-shirts and generates $500,000 in total revenue from selling 10,000 units of t-shirts in a given period. The company also has $200,000 in cost of goods sold (COGS), which includes the cost of materials, labor, and overhead expenses to produce and sell the t-shirts.
The company's gross profit can be calculated as follows:
Gross Profit = Total Revenue - Cost of Goods Sold
Gross Profit = $500,000 - $200,000
Gross Profit = $300,000
This means that Company XYZ earned a gross profit of $300,000 from selling t-shirts during the period.