What Affects Gross Profit & Cost of Goods Sold?

There are several factors that affect gross profit and cost of goods sold. They have a direct relationship: Gross profit can be impacted by cost of goods sold, and your gross profit is your net sales minus cost of goods sold.

Effects

Net sales represent all the revenue generated from the sale of products and services. When net sales increase, your cost of goods will increase, which affects your gross profit. The ideal situation is to increase your net sales more than you increase your cost of goods sold.

Considerations

Costs of goods sold are all of the costs associated with manufacturing a product or service. If the cost of raw materials used to manufacture products and services increases, then your costs of goods sold will be higher, and your gross profit will be lower.

Function

When the production crew receives an annual salary increase, your costs of goods sold will increase and lower your gross profit.

Features

Your beginning inventory plus net purchases--minus cost of goods sold--equals your ending inventory. The shipping and handling costs needed to get goods into inventory can also affect the costs of goods sold.

Expert Insight

You can calculate the value for inventory in several ways, including first-in first-out (FIFO), last-in first-out (LIFO), and the average cost method. When there is inflation, the method you use can determine the value of cost of goods sold, according to investopedia.com. If costs of goods sold are valued higher, based on the method used, the gross profit is less.

References

• investopedia.com: inventory valuation for investors - FIFO and LIFO
• understanding-accounting.net: inventory and cost of goods sold