Definition: Gross income is defined as total revenues of a business minus cost of goods sold. To state it more simply, it is sales minus the cost of producing the good or service.
What Does Gross Income Mean?
This figure is normally found in the income statement of any company’s annual report. It is a very useful metric to understand how much money the company keeps for each dollar being sold. This will be accomplished by dividing the gross income by total revenues. High gross incomes are especially helpful when the economy is not doing well since the company can reduce its prices to stay competitive.
On the other hand, a high gross income means that company products are perceived as more valuable than the cost of producing it; that often means there’s an added intangible value, which is normally the case for technology product. A low gross income commonly means that the market is too crowded with competitors or the industry is decaying due to obsolescence or product substitution.
Let’s take a look at this example
Gary’s Ties LLC is a company that produces custom-made ties. The company currently sells its products online through its own website and they are getting a lot of business. The company sells the ties for $22 and the cost of manufacturing each tie is $7. Last year the company sold 23,250 ties and this year the company’s goal is to sell 34,000 units. In this case, what would be the gross income for both last year and this year?
According to our concept, gross income is defined as total revenues of a business minus cost of goods sold. In this case, last year’s revenues were $511,500 ($22 x 23,250) and cost of goods sold was $162,750 ($7 x 23,250), which left the company a gross income of $348,750. On the other hand, this year forecasted gross income is $510,000 ($22 x 34,000 minus $7 x 34,000).