How is gross profit calculated?

• A. Revenue minus total costs
• B. Revenue minus cost of sales
• C. Cost of sales minus fixed costs
• D. Revenue minus expenditures

Answer: (B)

Gross profit is calculated by deducting the cost of sales from revenue. This figure represents the earnings a business makes after accounting for the costs directly associated with producing its goods or services. These costs may include things like raw materials, labor, and direct overheads.

Understanding how gross profit is calculated is essential for assessing a company's efficiency in managing its production and operational costs. It helps in evaluating how well a business controls its costs in relation to its sales performance. A higher gross profit margin indicates a more profitable company, as it retains more of each dollar of revenue after covering the direct costs of goods sold.

The other calculations do not accurately reflect the calculation of gross profit. For instance, calculating revenue minus total costs would yield net profit, which includes both fixed and variable costs. Similarly, considering cost of sales minus fixed costs confuses different cost categories and wouldn’t provide a meaningful metric like gross profit. Revenue minus expenditures does not focus solely on the costs directly tied to production, leading to an incomplete picture of profitability.