Sales revenue used for this computation is net sales (which takes into account sales returns and allowances and sales discounts). On the basis of the sales data presented in Illustration 5-5 and the cost of goods sold data in Illustration 5-10, the gross profit for Highpoint Electronic is $144,000, computed as follows:
A company’s gross profit may also be expressed as a percentage by dividing the amount of gross profit by net sales. For Highpoint Electronic the gross profit rate is 31.3% ($144,000 — $460,000). The gross profit rate is generally considered to be more useful than the gross profit amount because it expresses a more meaningful (qualitative) relationship between net sales and gross profit. For example, a gross profit of $1,000,000 may be impressive. But, if it is the result of a gross profit rate of only 7%, it is not so impressive. (more…)
