What is the formula for Gross Profit?

• A. Revenue - COGS
• B. Revenue + COGS
• C. Revenue - Expenses
• D. Net Profit + COGS

Answer: (A)

Gross profit shows the amount a business earns from its core trading activities after covering the direct cost of goods sold. It is calculated by subtracting the cost of goods sold from the revenue generated from sales. This is why the correct formula is revenue minus cost of goods sold.

If you added COGS to revenue, you’d be mixing in costs with revenue in a way that doesn't reflect profit. If you subtract all expenses from revenue, you’d be looking at operating or net profit, not gross profit, because operating expenses beyond COGS are also taken out. And adding COGS to net profit would double-count costs, giving a value that doesn’t represent gross profit.

Example: with revenue of 100 and COGS of 60, gross profit is 40. If total expenses (beyond COGS) amount to 25, net profit would be 15, not 40.