In order to calculate gross profit ratio we require cost of good
sold and the net sales of a company. In other words we require the revenue and
the cost of goods sold figures of a company. Revenue of the company is also
called its net sales. So the formula to calculate gross profit is as under

**Net Sales= Gross Sales**

Now gross profit will b calculated by deducting the cost of
goods sold

**Gross Profit = Gross Sales – Cost of goods sold**

Again gross profit must not be
messed up with the operating income. In order to calculate operating income we
require net income that is the different between the gross profit and operating
expenses including taxes and interest payments.

**Net Income = Gross Profit – operating expense – taxes – interest payments**

**Operating Profit = Gross Profit – Total operating expenses**

In order to understand gross profit
in a better way lets have an example of gross profit calculation. Suppose a
company XYZ has revenue or net sales amount equals to $30,000. Now assume that
cost of goods sold is equal to the $20,000. Now to calculate gross profit we
simply need to put the formula as mentioned above:-

**Net Sales/ Revenue**= $30,000

**Cost of goods sole**= $20,000

**Gross Profit**= 30,000 – 20,000

**Gross Profit**= $10,000

Now we can simple use gross profit
to calculate gross profit ratio. In order to calculate gross profit ratio we
will divide the gross profit by the total revenue or the net sales and will
multiply the answer with hundred.

**Gross Profit Ratio**= Gross Profit/ Revenue x 100

**Gross Profit Ratio**=10,000/30,000x100

**Gross Profit Ratio**= 30 percent

All the figures required to
calculate gross profit and gross profit ratio are generated from the income
statement of the company’s financial profile.

Gross profit between the two
companies can be calculated to measure the degree of efficiency of a company to
produce same level and number of goods. For example company A and company B
have sales of $ 1 million each. Assume that the cost of goods sold of company A
is 90,000 dollars where as the cost of goods sold of company B is 80,000. The
gross profit of company A is $100,000 where as the gross profit of company B is
$200,000. This means company B uses same resources more efficiently to produce
same number of products as compared to company A. in other words Company B spends
less in producing the same amount of goods as produced by the company A.