How is gross profit calculated?

Gross profit is calculated by subtracting the costs of goods sold (COGS) from total revenue. This figure represents the profit a company makes after accounting for the direct costs associated with producing its goods or services. By using this formula, businesses can assess how efficiently they are producing and selling their products. The resulting gross profit is essential for understanding overall profitability and plays a key role in financial analysis and business decision-making.

In contrast, other options do not accurately represent the calculation of gross profit. Adding COGS to revenue would yield a figure that does not reflect profitability. Multiplying revenue by COGS or dividing COGS by revenue also misrepresents how these financial figures interact to determine profitability.