Gross Profit Ratio is a

**type of Profitability Ratio**that determines the**mathematical relation between Gross Profit and Revenue from Operation.**It indicates the Gross Margin on Products sold.Gross Profit Ratio = Gross Profit / Net Sales

**Where,****Gross Profit = Revenue from Sales – Cost of Goods Sold (COGS)****And Net Sales is the Total Revenue from Sales.**__Gross Profit Ratio multiplied by 100 provides the Gross Profit Margin in percentage Terms.__

## Significance and Interpretation

- It is very important for an industry to
**maintain a stable Gross Profit Ratio,**frequent variations in the ratio points towards its instability. **High Gross Profit Ratio is expected by every company**to indicate high profits.**Factors that affect the Gross Profit Ratio**are as following:**High Price:**The high price of a product will directly influence the profit associated, keeping the manufacturing costs at the same level. Higher Price of a product may be due to several reasons as below:(6GB RAM vs 2GB RAM)__Superior Products__(e.g. Samsung vs Vivo)__Brand Value__(Magnetic Hard Disk vs Solid State Drives)__Use of Technology__**Low Product Cost:**Cost of Goods Sold (COGS) directly affects the Gross Profit of the company, a low COGS indicates Higher Gross Profit Ratio.

### Examples

**Example 1: Given below are few details of M/S XYZ Ltd., use them an calculate the Gross profit ratio for M/S XYZ Ltd.**

Particulars | Amount (in Rs.) |
---|---|

Revenue from Sales (Cash) | 100000.00 |

Revenue from Sales (Credit) | 55000.00 |

Cost of Labour | 40000.00 |

Material Cost | 45000.00 |

**Solution:**- Net Sales Revenue = Cash Revenue from Sales + Credit Revenue from Sales = Rs. 155000.00
- Cost of Goods Sold = Cost of Labour + Material Cost = Rs. 85000.00
- Gross Profit = Net Sales Revenue – Cost of Goods Sold = 155000 – 85000 = Rs. 70000.00
- Gross Profit Ratio = Gross Profit / Net Sales Revenue = 70000 / 155000 = 14 / 31
**Hence, Gross profit Ratio = 14/31 or 0.4516 or 45.16%**