Last Updated 28 Jan 2021

Gross profit

Category Finance
Essay type Research
Words 237 (1 page)
Views 118

Gross profit means a firm’s revenue minus its cost of goods sold. The cost of goods sold consists of the fixed and variable product costs, but it excludes all of the selling and administrative expenses. It serves as the source for paying additional expenses and future savings. It is a financial metric used to access a firm’s financial health by revealing the amount of money left over from revenues after accounting for the cost of goods sold.

When analyzing a company, gross profit is so important because it directly indicates how efficiently management uses labor and supplies in the production process. Gross profit margin is gross profit as a percentage of revenue. Gross profit margin=(Revenue – COGS)/ Revenue. This metric can be used to compare a company with its competitors. More efficient companies will usually see higher profit margins. Contribution margin is a cost accounting concept that allows a company to determine the profitability of individual products.

It is calculated as: (Product Revenue – Product Variable costs) Thus, the contribution margin includes two parts- the fixed cost and the net profit. Contribution Margin Ratio=(Product Revenue – Product Variable costs)/ Product Revenue Contribution Margin Ratio is used to determine the range of products to be produced by the company. If the contribution margin ratio is unattractive, the management may decide to drop the unprofitable product from the portfolio in order to produce an alternate product with a higher contribution margin ratio.

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Gross profit. (2018, Apr 17). Retrieved from https://phdessay.com/gross-profit/

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