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%.
