How to Find the Gross Profit for a Single Item

Convert the manufacturing cost and sale price of a set of chairs to unit value for an individual chair.

Gross profit is a statistic that records the amount of money a company earns on a product before subtracting additional costs, such as income taxes. To determine gross profit for a single item, the company first must convert its other expenses and revenues into their single item equivalents.

Instructions

1. Record the total revenue. Total revenue is the sum of all of the money that the company has received during the year. This includes revenue from many sources, such as credit card receipts, checks, cash, and other types of promises to pay the company for providing goods or services.

2. Find the total cost of goods sold. Cost of goods sold includes direct costs used to produce a product, also known as variable costs. This includes the cost of purchasing materials, such as lumber and bars of metal, used to produce an item. The cost of goods sold includes additional costs such as energy used to power machinery in a factory, as well as the paychecks of extra workers hired to finish a job. If the company has to buy boxes to package the finished goods, or pay postage to ship the product, this is also considered cost of goods sold according to the University of Montana.

3. Divide the total revenue by the number of items sold. This requires recording products sold through every channel, including retail stores, independent sales agents, wholesalers, and products directly sold by the factory. Do not include products that are located in stores, but have not been sold to a final customer yet, such as products on consignment. This provides the revenue per product.

4. Find the cost of goods for an individual item. This requires the company to calculate the average cost of materials used to produce a product. The company records the total cost of purchasing materials, energy bills, and labor costs, and divides it by the number of items produced. If materials are used to produce partially completed products, the company uses a percentage of completion to measure cost of goods. For example, if a batch of chairs are seventy percent complete, the company multiplies the number of partially completed chairs by seventy percent to calculate the total items produced.

5. Divide the revenue received per product by the total items produced. This calculation provides the gross profit per item. Gross profit may also be reported as a percentage. For example if an item sells for ten dollars and the cost to make each unit is eight dollars, gross profit can be reported as either two dollars or twenty percent, since two dollars is twenty percent of ten dollars.

References

• University of Montana: Break Even Analysis
• Ohio State University: The Profit and Loss Statement
• University of Tennessee: Selling Price