Gross profit calculator

This gross profit calculator and Gross Profit Margin calculator will help you determine the right selling prices for your products in order to save money and increase profits.

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How to Calculate Gross Profit

A very important financial concept for every startup and business is calculating gross profit and gross profit margins. The way to do this is to get a gross profit markup.

Gross profit calculation formula
The way to calculate gross profit is:

How much it costs to make – how much you sell it for = gross profit.

The cost to make a product includes all the costs from start to finish that you pay. Use the discounted amount if you can get products or raw materials at a discount.

Understanding Gross Profit: Difference between variable and fixed costs

If you want to dig deeper, there is a difference between variable and fixed costs.

Variable costs (aka. cost of goods sold, direct costs) go up as the amount of products or services you make go up. Think about variable costs like:

  • Packaging
  • Post and sending costs
  • Cost for materials
  • Cost for production
  • Costs for storage

Variable costs are what you use to calculate gross profit. 

Fixed costs (aka. operating expenses, costs of doing business, indirect costs) don’t change so quickly when your sales and number of products go up. They are more static. Think about things like:

  • Rent
  • Office supplies
  • Costs for administration
  • Insurance
  • Advertising and sales

Fixed costs aren’t included in the calculation of your gross profit.

Gross Profit vs. Gross Profit Margin

Gross profit is a currency value (Euro, Dollar, Pound), while gross profit margin is a percentage. The gross profit margin formula is:

Gross Profit / Sales = Gross Profit Margin.

Gross profit margin is also important to track to keep an eye on profitability trends. This is critical because many businesses have gotten into financial trouble with an increasing gross profit that coincides with a declining gross profit margin.

In writing it is how much it costs to make, minus how much you sell it for. Now we have the Gross Profit an amount in dollars or euros. Now divide that by how much you sell it for and you’ll have your gross profit margin.

How to Calculate Gross Profit Margin (Example)

Let’s look at an example of gross margin. A bike-maker, who sells bikes for $300. They cost $120 to make, generating the retailer a gross profit of $180. This equates to a margin of 60%.

  • Total product revenue (how much you sell it for): $300
  • Total production costs (how much it costs to make): $120
  • Gross profit: 300-120 = $180
  • Gross profit margin: 180/300 x 100 = 60

Gross Profit vs. Net Income

Gross profit includes only the variable costs. Net income shows the profit earned after all expenses, including fixed costs, too.

Gross profit reveals how well a company manages production, sourcing, and spoilage. Net income assesses if the operation is profitable, including admin costs, rent, insurance, and marketing spending.

Net income is often called the bottom line because it’s at the end of a company’s income statement. It’s the company’s total profit after all expenses, including operating costs, taxes, and interest.

How to Increase Gross Profit

There are only 3 ways to increase gross profit and gross profit margin:
1. Increase your sales prices.
2. Decrease the cost of production.
3. Sell more.

Sounds great, but it isn’t as easy as it sounds. Because if you increase prices, this might cause sales to drop. Yikes! And if sales decrease too much, the whole idea of increasing the price might leave you worse than you started. There would be a higher gross profit margin, but lower total gross profit.

Unless you are undercharging, be careful with price increases. Do a competitive analysis and see what your competitors are up to. Are customers loyal (enough) not to switch? One of the tactics that are used often in business is to add an extra tier or product line that has a higher price or margin. Or even launch a new brand.

The second way to have the outcome of your gross profit calculation come out better is to decrease the costs of products sold. Lower the variable costs.

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What’s the difference between gross and net profit margin?

Gross profit margin is your profit divided by revenue. Net profit margin is profit minus fixed costs divided by revenue. It’s the money that ends up in your pocket. 

While gross profit margin is useful to measure, investors are more likely to look at your net profit margin because it shows you can cover your operating costs.

How do I calculate a 20% profit margin?

To calculate a 20% profit margin:

  1. Subtract 0.2 (decimal form of 20%) from 1 to get 0.8.
  2. Divide the original price by 0.8 and you’ll get how much you should charge for a 20% profit margin.

If the product costs $60, you should charge $75 to get a 20% profit margin.

What is a good margin?

A high gross profit margin indicates you’re making money on a product. A low margin means your sale price is just a bit higher than the cost. But it’s important to remember that while these figures are useful, margins vary widely by industry and company size.

Manufacturing companies generally have high gross profit margins. Those that buy and sell goods, such as stores, tend to have lower gross margins.

How do I calculate margin in Excel?

It’s easier to use our calculator, but it’s useful to know how to calculate margin in Excel if you’re setting the sales prices of many products. Here’s how you do it:

  1. Input the variable costs of your products into cell A1.
  2. Input the price of the product into cell B1.
  3. Calculate profit by subtracting cost from revenue. In C1, input =B1-A1 and label it profit.
  4. Divide profit by revenue and multiply it by 100. In D1, input =(C1/B1)) and label it margin.
  5. Right-click on the final cell and select Format Cells.
  6. In the Format Cells box, under Number, select Percentage and specify your desired number of decimal places.

If you have the variable costs and prices of multiple items in columns, you can use this formula to quickly generate profit and margin for all the items.

Are margin and profit the same?

No, margin and profit aren’t the same. Margin metrics are percentage values, so they deal with relative change. Profit is expressed in currency, providing absolute context and good for comparing day-to-day operations.
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