How is gross profit calculated?

Gross profit is calculated using the formula that deducts the cost of goods sold (COGS) from total revenue. This calculation focuses specifically on the direct costs associated with producing the goods or services that a company sells. By subtracting COGS from revenue, you can assess how efficiently a company is producing its goods and the profitability of its core business operations before considering other expenses such as operating expenses, taxes, or interest. This metric is crucial as it provides insight into the gross profitability of a company, allowing stakeholders to evaluate the effectiveness of production and pricing strategies.