The profit calculator is a simple tool that lets you calculate the profit that is earned when selling something. This article will show you how to calculate profit and explain gross profit. The last section will cover how to calculate profit percentage.
Whether you are an owner of a restaurant selling pizza or have a small café with the best coffee in town, you probably have two questions on your mind. The first one, How much can you sell this product for? is answered in our optimal price calculator. And the answer to the second question, How much profit are you going to make by selling it? is in the following article, along with sections explaining the profit formula and gross profit definition. Read on and learn more about profit!
What is profit? Profit definition
To answer the question "what is profit", we have to go back a bit. Instead of providing a profit definition, let's do it more naturally - you have an item you wish to sell. It doesn't matter whether you're selling homemade beauty products or just reselling some old clothes - producing items or acquiring them always has a cost. For the sake of simplicity, let's assume that each item you sell has the same cost per product, regardless of how many you sell. This is usually the case for small businesses or individuals.
Keep in mind that it will be different when talking about large production lines. For example, car companies tend to enjoy economies of scale - the more cars they produce, the cheaper it gets to build each of them. It means that the object's marginal cost, the cost added by creating an additional unit, is decreasing. The change in price depends on the actual level of production.
Every item you wish to sell has a sale price. When you sell the item, this price becomes your income or revenue. In other words, revenue is the money generated from selling things. The more items you sell, the higher your revenue will be.
Profit is the difference between the price and cost when talking about one item. When dealing with higher volumes of items, total profit is the difference between revenue and total cost. Generally speaking, profit is the incentive behind the majority of business transactions. One side wants to buy a product or a service, and the other wants to sell it for a profit.
To recap and understand what profit is:
- First, remember that cost is money spent;
- Then, revenue is money earned; and
- Finally, profit is money gained.
How to calculate profit - profit formula
When calculating profit for one item, the profit formula is simple enough:
profit = price - cost.
When determining the profit for a higher quantity of items, the formula looks like this:
total profit = revenue - total cost,
or expressed differently
total profit = unit price × quantity - unit cost × quantity.
All sorts of reverse calculations are possible, and you don't have to start entering variables from the top. If you sell items over a period of time and want to know your monthly revenue, check out our sales calculator.
Depending on the quantity of units sold, our profit calculator can also determine the total cost, profit per unit, and total profit. The variables used in these equations are:
- Cost - The amount for which items are acquired or produced, also known as the cost of goods sold;
- Unit cost - The amount for which a single item is acquired or produced,
- Price - Price for which the items are sold;
- Unit price - The amount for which a single item is sold;
- Quantity - The number of items for which the profit is calculated;
- Total cost - Tost multiplied by the number of items;
- Discount - The percentage price reduction; and
- Total profit - Total amount of money gained.
What is gross profit? Gross profit definition
Going by the accounting gross profit definition, it is the difference between revenue and cost of goods sold (COGS) before deducting overheads, payroll, taxation, and interest payments. COGS is another accounting term found in income statements. It is the cost associated directly with buying or producing a particular item.
If you are wondering how to calculate gross profit, we have great news for you. Our profit calculator can be used as a gross profit calculator to calculate gross profit. It is entirely up to you since it depends on what you choose to include in the cost calculator's field; if you stick strictly to the definition of the COGS, the result you get will be gross profit. If you need to include things such as taxes or the cost of transportation, the result will be profit in a more general sense.
How to calculate gross profit - an example
You are selling items and want to know how to calculate gross profit. Let's assume you are selling 45 metal boxes, which cost you a grand total of $1125 to produce. Each box costs you $25 to make, and you sell them at $33 a box. In this case, your profit after selling one box would be:
profit = $33 - $25 = $8.
You can also sell 15 boxes for $495. This is for $33 per box again:
total profit = $33 × 15 - $25 × 15 = $495 - $375 = $120
How about selling all 45 of them?
total profit = $33 × 45 - $25 × 45 = $1485 - $1125 = $360
Your revenue from selling 45 metal boxes is $1485. The total cost is equal to $1125. The difference, the total profit, is equal to $360 in our example. Sometimes when selling a large number of products, you can also reward a customer with a discount - decreasing the price by a percentage. The calculations are not very complicated. However, if you want to check different prices and quantities quickly, we recommend using our profit calculator. You'll also avoid any mistakes when calculating!
How to calculate profit percentage
Finally, this calculator deals with raw numbers, but there are other useful metrics when it comes to calculating profit. Sometimes instead of the monetary amount, you want to know the numbers expressed as percentages. In this case, there are two important metrics you can calculate. The first is profit margin. This is the percentage of the selling price that is turned into profit. If you want to know more about it, our profit margin calculator is a great tool.
The other, markup or profit percentage, is the ratio between the cost of a product and its selling price. Markup is expressed as a percentage of the cost. How to calculate profit percentage? Check out the markup calculator!
What is gross profit?
Gross profit is the revenue generated from sales minus the cost of goods sold (COGS), serving as an initial measure of a company's profitability.
How to calculate gross profit?
You can calculate gross profit in three steps:
- Determine the revenue.
- Calculate the cost of goods sold (COGS).
- Apply the gross profit formula:
gross profit = revenue - COGS.
What is profit sharing?
Profit sharing is a system where employees receive a portion of the company's profits, usually as a bonus or part of their compensation package.
What is the gross profit is the revenue is $5,000 and COGS is $2,000?
The gross profit is $3,000. You can calculate this by subtracting COGS from revenue.