Gross margin is:

Gross margin is:

• A. Gross profit divided by net sales
• B. Gross profit minus cost of goods sold
• C. Net income divided by net sales
• D. Net sales minus operating expenses

Answer: (A)

Gross margin describes how much of each sales dollar remains after paying for goods sold. The best answer expresses this as a ratio: gross profit divided by net sales. Here’s why: gross profit is net sales minus cost of goods sold, so dividing that by net sales shows the portion of sales left after covering the direct production costs, i.e., the margin on sales. For example, if net sales are $100 and cost of goods sold is $60, gross profit is $40 and the gross margin ratio is 40/100 = 0.40 or 40%. The other options reflect different measures: gross profit minus cost of goods sold isn’t a standard metric, net income over net sales is the net profit margin (all expenses considered), and net sales minus operating expenses is operating income, not gross margin.

Gross margin describes how much of each sales dollar remains after paying for goods sold. The best answer expresses this as a ratio: gross profit divided by net sales. Here’s why: gross profit is net sales minus cost of goods sold, so dividing that by net sales shows the portion of sales left after covering the direct production costs, i.e., the margin on sales. For example, if net sales are $100 and cost of goods sold is $60, gross profit is $40 and the gross margin ratio is 40/100 = 0.40 or 40%.

The other options reflect different measures: gross profit minus cost of goods sold isn’t a standard metric, net income over net sales is the net profit margin (all expenses considered), and net sales minus operating expenses is operating income, not gross margin.