Gross Profit

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DEFINITION of 'Gross Profit'

A company's revenue minus its cost of goods sold. Gross profit is a company's residual profit after selling a product or service and deducting the cost associated with its production and sale.

To calculate gross profit: examine the income statement, take the revenue and subtract the cost of goods sold. Also called "gross margin" and "gross income".

INVESTOPEDIA EXPLAINS 'Gross Profit'

When analyzing a company, gross profit is very important because it indicates how efficiently management uses labor and supplies in the production process. More specifically, it can be used to calculate gross profit margin. Keep in mind that gross profit varies significantly from industry to industry. For example, take a look at the following situation to see how gross profit indicates a company's efficiency.

Company A and Company B both have $1 million in sales. Company A's cost of goods sold (COGS) is $900,000 and Company B's COGS is $800,000. Company A's gross profit will be $100,000 and Company B's gross profit will be $200,000. Company B spends less money to make the same amount of sales, and is therefore more efficient.

Learn a little more about gross profit in the article Understanding Profit Metrics: Gross, Operating and Net Profits.

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