Gross Profit is calculated by subtracting the Cost of Goods Sold (COGS) from Net Sales. This approach reflects the direct profitability of a company's core business activities related to the production of goods or services sold. By using the formula, you are able to isolate the profit made from sales before accounting for other expenses such as operating expenses, taxes, and interest.
Net sales represent the revenue from sales after deducting returns, allowances, and discounts, while COGS includes all the direct costs attributable to the production of the goods sold. This calculation is crucial for assessing the efficiency of production and sales processes and provides key insights into how well a company is managing its costs relative to its revenues. Understanding Gross Profit helps stakeholders make informed decisions about pricing strategies, cost control, and overall profitability.