How To Calculate Gross Profit in 2025 – Formula & Examples

Imagine this: Neha runs a small bakery selling cupcakes. Last month, she baked 50 cupcakes and sold each one for ₹100, making a total of ₹5,000 in sales. But wait—she spent ₹60 on ingredients and baking for each cupcake, which adds up to ₹3,000 as her Cost of Goods Sold (COGS). 

So, her gross profit was ₹2,000 (₹5,000 minus ₹3,000). Isn’t it interesting how this simple number shows how well she managed her baking costs?

Here’s why it matters

• Total Revenue: ₹5,000 from selling cupcakes
• COGS: ₹3,000 spent on making those cupcakes
• Gross Profit: ₹2,000 left after covering direct costs

This helps Neha determine if her business is generating a profit from what she sells before paying rent, wages, or bills. Cool, right?

What Is Gross Profit?

On a bright Monday morning, Sara baked 50 cupcakes and sold each one at ₹100, earning a total of ₹5,000 in revenue. The cost of ingredients, packaging, and baking per cupcake was ₹60, so her Cost of Goods Sold (COGS) totalled ₹3,000. That left her with a Gross Profit of ₹2,000 (₹5,000 – ₹3,000).

Gross Profit is the money a business makes after subtracting the direct costs of producing or selling its products. It shows how efficiently Sara managed her baking costs.

Later, she paid ₹1,200 for rent, wages, and electricity. So her Net Profit came down to ₹800 (₹2,000 – ₹1,200).

Key Points:

• Total Revenue: ₹100 × 50 = ₹5,000
• COGS: ₹60 × 50 = ₹3,000
• Gross Profit: ₹5,000 – ₹3,000 = ₹2,000
• Net Profit: ₹2,000 – ₹1,200 = ₹800
  
  

How to Calculate Gross Profit?

Imagine a small company called Elite Furniture that sells handcrafted chairs. In one month, it sold 500 chairs at ₹5,000 each, earning a total revenue of ₹ 2,50,000.

To make those chairs, the company spent:

• ₹75,000 on raw wood and materials
• ₹50,000 on direct labour (carpenters’ wages)
• ₹20,000 on factory rent and electricity (manufacturing overhead)
• ₹10,000 on packaging and shipping
• ₹5,000 as depreciation on tools and machines

That totals to ₹1,60,000 in COGS.
Gross Profit = ₹2,50,000 – ₹1,60,000 = ₹90,000

Key Pointers

• Gross profit shows how efficiently a company produces and sells goods.
• It doesn’t include admin, marketing, or office costs.

Steps to Calculate Gross Profit (in detail)

1. Determine Total Revenue:
   Multiply the number of units sold by the selling price per unit.
   Example: 500 chairs × ₹5,000 = ₹2,50,000
   
   
2. Calculate COGS (Cost of Goods Sold):
   Add all direct costs:
   • Raw materials (e.g., wood): ₹75,000
   • Direct labour: ₹50,000
   • Manufacturing overhead (rent, utilities): ₹20,000
   • Packaging & shipping: ₹10,000
   • Depreciation on machinery: ₹5,000
     Total COGS = ₹1,60,000
     
     
3. Apply the Formula:
   Gross Profit = Total Revenue – COGS (Cost of Goods Sold)
   ₹2,50,000 – ₹1,60,000 = ₹90,000

Gross Profit Margin vs. Gross Profit:

One evening, Maya set up a stall selling 200 scented candles at ₹300 each, earning a total revenue of ₹ 60,000. She spent ₹150 per candle on wax, wicks, and packaging—₹30,000 in cost of goods sold (COGS). That left her with a gross profit of ₹30,000. In percentage terms, she kept 50% of every rupee she made.

Key Pointers:

• Gross Profit shows the rupee amount left after direct production costs.
• Gross Profit Margin reveals how efficiently profit is made from sales.
• A higher margin means more profit per rupee of revenue.
  
  

Common Mistakes in Calculating Gross Profit

Let’s say Ravi runs a small handmade soap business. In one quarter, he sold soaps worth ₹1,00,000. He believed his COGS was ₹40,000, so he proudly reported a gross profit of ₹60,000. But there was a catch.

He forgot to include ₹10,000 paid to workers (direct labour) and mistakenly added ₹8,000 for social media ads into COGS, which is an indirect cost. 

Worse, he didn’t adjust for unsold inventory worth ₹5,000 still sitting in storage. When corrected, his actual COGS was ₹47,000, not ₹40,000—and the real gross profit was just ₹53,000, not ₹60,000.

Key Pointers:

• Include all direct costs like labour and materials.
• Don’t mix indirect costs into Cost of Goods Sold (COGS).
• Always account for inventory changes.
  
  

Tools and Tips to Track Gross Profit Efficiently

Let’s say Ritu runs an online fashion store. In January, she earned ₹5,00,000 in revenue. Her COGS—including fabrics, tailoring, and packaging—totalled ₹3,20,000, giving her a gross profit of ₹1,80,000. By using Excel and Power BI, she tracked this monthly. 

In March, gross profit dipped to ₹1,20,000, prompting her to review rising fabric costs and adjust suppliers, improving April’s profit back to ₹1,90,000.

Tools and Tips to Track Gross Profit

Why Gross Profit Matters for Your Business?

Let’s say Rahul sells smartphones in his store. Last month, he sold 100 phones at ₹15,000 each, making ₹15,00,000. The cost to buy and prepare these phones was ₹12,00,000, so his gross profit was ₹3,00,000. 

When his profit started shrinking despite steady sales, he investigated and found that supplier costs were rising. He then renegotiated prices and raised retail prices to protect his profit.

Why Gross Profit Matters:

• Shows how well your core business is performing.
• Helps set effective pricing strategies.
• Reveals which products or services are most profitable.
• Guides decisions on cost control and supplier management.
  
  

Conclusion

Gross profit is a crucial metric for any business. It shows how much money you make after paying for the direct costs of your products. Like Neha’s cupcakes or Rahul’s phones, it helps you know if you’re earning from sales before other bills. 

By checking it regularly and utilising tools like Excel or QuickBooks, you can prevent mistakes and maintain a healthy business. Simple but very helpful.

FAQs

Q1: What is gross profit?
Gross profit is the money left after subtracting the direct costs of making or selling products from total sales.

Q2: How do you calculate gross profit?
Gross profit = Total Revenue – Cost of Goods Sold (COGS).

Q3: What costs are included in COGS?
COGS includes direct costs like raw materials, labour, packaging, and manufacturing overhead.

Q4: Why is gross profit important for a business?
It helps measure how well a business is making money from its core products before other expenses.

Q5: What common mistakes should be avoided when calculating gross profit?
Don’t include indirect costs or forget direct labour and unsold inventory in COGS.

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