Plain definition
Gross profit is revenue less cost of sales under the company’s accounting policies. It differs from contribution because cost of sales can include costs that do not vary with a specific sales decision.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A retailer reports revenue and cost of sales, so gross profit is . A supplier price increase lifts cost of sales by . The manager can see gross profit fall to , then decide whether to change price, sourcing, product mix, or operating costs.
Why it matters
Gross profit reveals a key commercial spread, but it does not show financing, tax, or all operating costs and it does not equal cash collected.
Practical consequence
Use a consistent revenue and cost-of-sales policy, reconcile the measure to the accounts, and analyse price, volume, mix, and purchase-cost changes before drawing a conclusion.
Try your own numbers
Separate profit per unit, margin on selling price, markup on cost, and a target-margin price.
Margin and markup