Final answer:
The gross profit percentage is one of the most carefully watched measures of profitability. It illustrates how well a company generates sales relative to its cost of goods sold, providing insights into profit margins based on market pricing versus average cost.
Step-by-step explanation:
The gross profit percentage is a key measure that companies use to assess their financial health, specifically in terms of profitability. It is calculated by dividing the gross profit by net sales and multiplying by 100 to get a percentage. Gross profit itself is determined by subtracting the cost of goods sold from total sales. It indicates how well a company is using its resources to generate sales and maintain cost efficiencies in producing its goods.
To understand the concept further, we can look into the terms 'average profit' and 'profit margin'. Average profit is calculated by subtracting average cost from price, leading to the firm's profit margin. The profit margin is an indicator of how much profit the firm makes on each unit of output, given the current market price. Therefore, when the market price is above the average cost, the average profit is positive, yielding a positive total profit; conversely, if the market price is below the average cost, the firm may incur losses.
The gross profit percentage does not directly reflect a company's liquidity, solvency, or marketability, making option 'a' the correct answer—profitability.