Iloilo National High School – Senior High School Department

Luna St., La Paz, Iloilo City

SLM in Entrepreneurship for Quarter 2

Lesson 4. Computiation of Gross Profit

➢ What is It
As we all know that profit is a financial gain from a transaction or from a period of investment or
business activity, usually calculated as income in excess of costs or as the final value of an asset in excess
of its initial value.
It is a total revenue minus total expenses, profit is the amount of money a business "makes" during
a given accounting period. The more profit you make, the better, as profit can be re-invested into the business
or retained by the business owners. Being able to accurately determine your business's profit is an essential
part of being able to judge its financial health. It can also help you decide how to price your goods and
services, how to pay your employees, and more.

The profitability ratios are a group of financial statement that primarily determine the profitability
of the business operation.
The gross profit rate on a product is computed as:
Net Sales xxxxxxx
Less: Cost of sales xxxxxxx
Gross profit xxxxxxx

By using the formula, the gross of XYZ Trading in the year 2017
Net Sales P 734, 000.00
Less: Cost of Sales 577, 000.00
Gross Profit 157, 000.00

Profit is the gross income. The amount of gross profit provides information to the entrepreneur about
revenue earned from sales.
The term cost refers to the purchase price of the product including of the product including the total
outlay required in producing it.
The gross profit margin is computed as follows:
gross profit rate = gross profit x 100
net sales
The gross profit rate measures the percentage of gross profit to sales, indicating the profit that the
business realizes from the sale of the product.
The gross profit rate of XYZ Trading for the year computed as follows:
Gross Profit Rate = 157,000 x 100
734,000
= 21.39%
The gross profit rate may signal to the entrepreneur that the amount of margin on sales is 21.39%.
This rate will be used to determine whether the amount of gross profit can cover the operating of the business.
Since the gross profit rate of XYZ Trading is 21.39%, the cost ratio to sales will be 78.61%. This information
will help the entrepreneur in assessing whether the cost is too high or too low. Any product with a very high
cost will not become competitive in the market.
Operating Profit Margin Rate
The operating the profit margin is the excess of gross profit from operating expenses.

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Iloilo National High School – Senior High School Department
Luna St., La Paz, Iloilo City
SLM in Entrepreneurship for Quarter 2

Gross profit xxxxx

Less: Operating Expenses xxxxx
Operating profit margin xxxxx
The operating profit margin is the second level of revenue in the income statement. At this stage,
not only the cost of buying or making the product that has been deducted is included but also the operating
expenses. These are expenses incurred during a particular period only, and are not expected to provide
benefits to any future period. The operating expenses are also period costs.
In case there are no financing charges like interest, expenses, and income tax, the amount of the
operating profit margin is equal to the net income.
Gross Profit P157,000.00
Less:Operating Expenses P90, 000.00
Operating Profit Margin P67,000.00
This information that the business realized an income of P 67,000.00 during the year after deducting
the cost and operating expenses from the sales made.
Operating Margin Rate = Operating Profit Margin x 100
Net Sales
By applying: Operating Margin Rate = (67,000) x 100
734,000
= 9.13%
Net Profit Margin Rate
Operating profit margin xxxxxxx
Add: Interest Income xxxxxxx
Total
Less: Interest Expense xxxxxx

Income Tax xxxxxx xxxxxx

Net Profit margin xxxxxx

The Income statement.is the net profit margin & the third level in the revenue. The business is only given
consideration like interest expense and income tax.
Operating profit margin P67,000.00
Less: Income tax 20,000.00
Net profit margin P47,000.00
The income statement of XYZ Trading does not reflect any data on interest expense. Only income tax has
been deducted from the operating profit margin.
Net Margin Rate = Net Profit Margin x 100
Net Sales
By applying: Operating Margin Rate = (47,000) x 100
734,000
= 6.40%

As a future entreprenuer, one should always remember that nothing is permanent in the field of
entreprenuership. What is applicable to one entreprenuer may not be applicable to another. Certain things may
happen to one entrepreneur but may not happen to another.

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Iloilo National High School – Senior High School Department
Luna St., La Paz, Iloilo City
SLM in Entrepreneurship for Quarter 2

➢ Quiz # 1
Name: _____________________________________________________________________
Year and Section:_____________________________________________________________

Answer the Given Problem:

1. Annie bought one dozen smartphones for P200,000.00 with a discount of 5%. She sold half dozen at a
price of P18,000.00 per unit. However, a new model of smartphone became available in the market, so
she sold the remaining half dozen @ P12,000.00 each unit. What was her profit or loss?
Compute the Following Requirements:
a. Gross Profit
b. Gross Profit Rate

Solution (Box the Final Answer):

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Iloilo National High School – Senior High School Department
Luna St., La Paz, Iloilo City
SLM in Entrepreneurship for Quarter 2

➢ Quiz # 2
Name: _____________________________________________________________________
Year and Section:_____________________________________________________________
Directions: Write True if the statement is correct & write False if you think the answer is not correct.
________________1. The gross profit rate of the entrepreneurial venture is computed by dividing the cost
of goods sold by net sales.
_______________2. The gross profit rate provides information on the cost ratio of the business.
_______________3. In evaluating the profitability of the entrepreneurial venture, the evaluation must focus
on the information reflected on the face of the balance sheet.
________________4. The operating profit margin rate indicates information on the percentage of operating
expenses on the net sales.
________________5. Mr. Q is a practicing Doctor of Medicine. During the month of March 2019 he
received Professional Fees amounting to P 1,000,000 and total expenses of P250,000.
The net income of Mr. Q is P 750,000.
_________________6. Profit is the money received from customer in exchange of products given to
customer.
________________7. The gross profit rate of the entrepreneurial venture is computed by dividing the cost
of goods sold by net sales.
________________8. The gross profit rate provides information on the cost ratio of business.
________________9. One of the objectives in evaluating the gross profit rate of the business is to
determine whether the amount of the gross profit is sufficient to cover the operating
expenses.
________________10. The operating profit margin rate indicates information on the percentage of
operating expenses to net sales.
________________11 The government is not interested in financial statements since it is not a party to any
of the transactions of the business.
________________12. The net profit margin rate presents the general perspective of the operating
performance of the business.
________________13. The amount of income per peso investment can be determined by computing the
net profit margin rate.
________________14. In normal situation, it is favorable for the business to have high inventory
_________________15. Preparation & presentation of the financial statements of the entity is the primary
responsibility of an accountant.

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Iloilo National High School – Senior High School
Luna St., La Paz, Iloilo City
Modules in Entrepreneurship for Quarter 2

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