Gross Profit Defined with Example

Gross Profit

Gross profit or gross profit margin for an organization is the amount of money left after deducting cost of goods sold from revenues in a particular time period. You must not mix up gross profit with net operating profit. Overhead costs, payroll, taxation and interest payments are not subtracted from revenues to identity its value while these are subtracted when we calculate operating profit.

Importance of Gross Profit

Gross profit is one of the key indicators of an organization’s performance. It helps us to know increasing or decreasing of performance of the company over time and also we can compare the company’s position with its competitors. High-performing companies will make increasing gross profit and also will be able to pay more dividends to its investors. This also guides management to make important pricing and promotion decisions for the firm.

Example: Suppose, Northern Corporation (a fictitious company) has made a gross profit of $1434172 in the year 2011 and 1173836 in the year 2010. So, the gross profit of the firm has increased over the last one year.