## Definition of Gross Profit

Gross profit is an amount that is computed as follows:

- A company’s net Sales minus its cost of goods sold
- A product’s selling price minus the product’s cost

Gross profit is the amount before deducting the following expenses: selling, general, administrative, interest, and income tax.

## Definition of Gross Profit Margin

*Gross profit margin* is also referred to as the *gross profit percentage* or *gross margin ratio*. In that situation the calculation is:

- A company’s gross profit divided by the company’s net sales
- A product’s gross profit margin divided by the product’s selling price

## Definition of Gross Margin

Some use the term *gross margin* to mean exactly the same as *gross profit*. Perhaps they want to avoid the word *profit * since the selling, general, administrative, and interest expense have not yet been considered.

Others will use the term *gross margin* to mean the *gross profit margin* or *gross profit percentage* or *gross margin ratio*.

## Example of Gross Profit, Gross Profit Margin and Gross Margin

Assume that in its most recent year a company had net sales of $80,000 and cost of goods sold of $60,000. As a result, the company had a gross profit of $20,000 ($80,000 minus $60,000) and a gross profit margin of 25% ($20,000 divided by $80,000). Some people will say the company had a gross margin of $20,000 while others will say the company had a gross margin of 25%. Others might say the company had a gross margin ratio of 25%.