Legal Definitions - gross profit

Gross profit is a financial metric that represents the revenue a company earns from selling its goods or services, minus the direct costs specifically associated with producing or acquiring those goods or services. These direct costs are often referred to as the "cost of goods sold" (COGS) for products or "cost of services" for service-based businesses. Gross profit indicates how efficiently a company is managing the direct costs of its core operations before accounting for other operating expenses like rent, marketing, or administrative salaries.

Here are a few examples to illustrate how gross profit is calculated and what it signifies:

• Example 1: A Small Bookstore

  Imagine a local bookstore that sells a popular novel for $25. The bookstore purchased that specific copy of the novel from its distributor for $15. To calculate the gross profit for this single sale, you would subtract the direct cost of acquiring the book from its selling price.

  Calculation: $25 (Revenue from sale) - $15 (Cost of Goods Sold) = $10 (Gross Profit)

  Explanation: The $10 gross profit shows the immediate profit the bookstore made on that particular book sale, before considering other business expenses like the store's monthly rent, employee wages, or utility bills. It reflects the profitability of the core activity of buying and selling books.

• Example 2: A Custom Jewelry Maker

  Consider an artisan who crafts unique silver necklaces. She sells a custom-designed necklace for $400. The direct costs involved in making this specific necklace include $80 for the silver, $20 for the clasp and other findings, and $50 for the specialized labor directly spent on crafting that piece. (This labor cost would be for the time spent specifically on that necklace, not general administrative time).

  Calculation: $400 (Revenue from sale) - ($80 + $20 + $50) (Cost of Goods Sold) = $250 (Gross Profit)

  Explanation: The $250 gross profit represents the earnings from the sale of the necklace after covering the raw materials and direct labor needed to produce it. This figure helps the artisan understand the profitability of her craftsmanship itself, separate from her marketing efforts or workshop overhead.

• Example 3: A Software Development Agency

  A small agency develops a custom mobile application for a client, charging a total of $50,000 for the project. The direct costs associated with delivering this specific project include $15,000 paid to freelance developers contracted for the project, and $2,000 for specialized software licenses used exclusively for this client's app development.

  Calculation: $50,000 (Revenue from project) - ($15,000 + $2,000) (Cost of Services) = $33,000 (Gross Profit)

  Explanation: The $33,000 gross profit indicates the profit the agency made directly from providing the software development service, after accounting for the specific expenses tied to that project. It does not yet factor in the agency's general office rent, permanent staff salaries (not directly billed to the project), or marketing expenses.