Final answer:
The gross margin ratio should be less than the profit margin ratio because the gross margin ratio only considers the cost of goods sold, while the profit margin ratio takes into account all expenses.
Step-by-step explanation:
The gross margin ratio should be less than the profit margin ratio.
The gross margin ratio is calculated by dividing gross profit by net sales, and it represents the percentage of each sales dollar that is left after subtracting the cost of goods sold. The gross margin ratio indicates how efficiently a company is managing its production costs.
On the other hand, the profit margin ratio is calculated by dividing net income by net sales, and it represents the percentage of each sales dollar that is retained as profit after subtracting all expenses, including both production costs and operating expenses. The profit margin ratio indicates the overall profitability of a company.
Since the gross margin ratio only considers the cost of goods sold and does not include operating expenses, it is usually lower than the profit margin ratio, which takes into account all expenses. Therefore, the gross margin ratio should be less than the profit margin ratio.