Question

True /False : The gross profit percentage is computed by dividing operating income by net sales.

Answer 1

The given statement "The gross profit percentage is computed by dividing operating income by net sales" is False.

Step-by-step explanation:

The gross profit percentage is not computed by dividing operating income by net sales. The correct formula for gross profit percentage is:

\
`[ \text{Gross Profit Percentage} = \left( \frac{\text{Gross Profit}}{\text{Net Sales}} \right) * 100 \]`

Gross Profit is calculated as the difference between Net Sales and Cost of Goods Sold (COGS). The formula for Gross Profit is:

`\[ \text{Gross Profit} = \text{Net Sales} - \text{COGS} \]`

So, Gross Profit Percentage is the percentage of revenue retained after accounting for the direct costs of producing goods or services. It gives a measure of how efficiently a company uses its resources to produce and sell its products.

In contrast, operating income is calculated after deducting both COGS and operating expenses from Net Sales. Therefore, dividing operating income by net sales would give the operating profit percentage, not the gross profit percentage.