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.
Cross profit represents the merchandising profit of a company. It is not a measure of the overall profitability of a company, because operating expenses have not been deducted. Nevertheless, the amount and trend of gross profit is closely watched by management and other interested parties. Comparisons of current gross profit with past amounts and rates and with those in the industry
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