Question

Gross margin can be defined as:

1) net sales minus the cost of the goods sold.
2) the selling price charged for a piece of merchandise or a service plus variable operating expenses.
3) the difference between total profits and total expenses.
4) the cost of merchandise in a retailer's inventory.
5) the cost of goods sold at less operating expenses.

Answer 1

Gross margin is defined as net sales minus the cost of goods sold, indicating a company's core profitability. Average profit, or profit margin, is price minus average cost and shows profitability when market price exceeds average costs. Accounting profit and economic profit provide deeper financial insights, considering explicit and implicit costs respectively.

Step-by-step explanation:

Gross margin is best defined as the net sales minus the cost of goods sold. This figure represents the core profitability of a company, before accounting for wider operational costs.

It reflects how efficiently a company can produce and sell its products. The definition of average profit complements this concept, which is calculated as price minus average cost.

This metric, often referred to as profit margin, illustrates if a business is making money when the market price is above average cost, leading to positive total profits. Understanding these concepts is crucial for assessing a firm's financial health and decision-making.

The related terms accounting profit and economic profit also paint a picture of a firm's financial status. Accounting profit is the total revenues minus explicit costs, which include depreciation, reflecting the business's profit in the conventional sense.

Economic profit goes further, subtracting both explicit and implicit costs from total revenues, to provide insight into the true economic value a firm generates.