How to Calculate a Firm's Gross Profit
A firm's gross profit is the amount of money it generates from selling its products after paying its direct product costs. A firm uses its gross profit to pay its operating expenses. You can calculate a firm's gross profit to determine its sales performance. A company influences its gross profit by raising or lowering its prices. A firm with rising gross profits may be gaining a competitive advantage over competitors and commanding higher prices for its products, while a firm with decreasing gross profits may be lowering its prices due to competitive pressure.
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Instructions
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Find the amount of a firm's sales, sales returns and allowances, and sales discounts on its income statement. The amount of sales returns and allowances is money a company loses due to defective products or unsatisfied customers, while sales discounts are incentives a company offers to customers to pay invoices on time. For example, assume a firm generated $50,000 in sales, had $5,000 in sales returns and allowances, and had $2,000 in sales discounts.
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Subtract sales returns and allowances from sales. Then subtract sales discounts from your result to calculate the firm's net sales. In the example, subtract $5,000 from $50,000 to get $45,000. Then subtract $2,000 from $45,000 to get $43,000 in net sales.
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Find the firm's cost of goods sold, which is the amount of its direct product costs, on its income statement. In the example, assume the firm's cost of goods sold is $20,000.
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Subtract cost of goods sold from net sales to calculate the firm's gross profit. In the example, subtract $20,000 in cost of goods sold from $43,000 in net sales to get $23,000 in gross profit.
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Tips & Warnings
Track a firm's gross profit over time and examine any positive or negative changes. A drop in gross profit may alert you to potential problems with a firm's sales.
