What is the gross profit formula?

• A. Gross Profit = Revenue - Operating Expenses
• B. Gross Profit = Revenue - Net Income
• C. Gross Profit = Revenue - Cost of Goods Sold
• D. Gross Profit = Cost of Goods Sold - Revenue

Answer: (C)

Gross profit shows how much money a company keeps from selling goods after covering the direct costs of making those goods. Revenue is the total sales earned, and Cost of Goods Sold includes the direct costs tied to producing those goods (materials, direct labor, and allocated manufacturing overhead). Subtracting COGS from revenue gives the amount available to cover other expenses and contribute to profit.

So the correct formula is: Gross Profit = Revenue − Cost of Goods Sold.

For example, if revenue is 100 and COGS is 60, gross profit is 40. Subtracting operating expenses would give operating income, and subtracting net income would not reflect the gross profit concept at all, since net income comes after many other deductions.