Multiple Choice
Which of the following is the most appropriate way for a company to measure profit growth over time?
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4. Merchandising Operations
Net Sales
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What does the gross profit percentage indicate in relation to net sales?
A
The percentage of net sales used to pay operating expenses.
B
The portion of net sales that remains after deducting the cost of goods sold.
C
The total amount of sales before any deductions.
D
The ratio of net income to total assets.
Verified step by step guidance1
Understand the concept of gross profit percentage: It is a financial metric that indicates the portion of net sales remaining after deducting the cost of goods sold (COGS). This helps assess the profitability of a company's core operations.
Identify the formula for gross profit percentage: \( \text{Gross Profit Percentage} = \frac{\text{Gross Profit}}{\text{Net Sales}} \times 100 \). Gross profit is calculated as \( \text{Net Sales} - \text{Cost of Goods Sold (COGS)} \).
Analyze the relationship between gross profit and net sales: The gross profit percentage shows how efficiently a company is producing and selling its goods relative to its net sales. A higher percentage indicates better profitability.
Compare the given options: Evaluate each option against the definition of gross profit percentage. The correct interpretation is 'The portion of net sales that remains after deducting the cost of goods sold.'
Apply this understanding in practice: Use the gross profit percentage to compare profitability across periods or with competitors, and to make informed decisions about pricing, production, and cost management.
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