Question

Rembrandt Paint Company had the following income statement items for the year ended December 31, 2024 ($ in thousands):

Sales Revenue: $5,200
Cost of Goods Sold: $2,800
Gross Profit: $2,400
Operating Expenses: $1,200
Net Income: $1,200
Calculate the gross profit margin for Rembrandt Paint Company. Explain the significance of the gross profit margin in assessing profitability.

Answer 1

The gross profit margin for Rembrandt Paint Company is calculated to be approximately 46.15%, which serves as a significant indicator of the company's efficiency in producing and selling its products at a profit.

Step-by-step explanation:

Calculating Gross Profit Margin

To calculate the gross profit margin for Rembrandt Paint Company, we can use the following formula: Gross Profit Margin = (Gross Profit / Sales Revenue) x 100. Using the provided income statement items, the calculation is as follows: ($2,400,000 / $5,200,000) x 100, which equals approximately 46.15%. The gross profit margin indicates the percentage of sales revenue that exceeds the company's cost of goods sold (COGS), which represents the efficiency with which a company uses its resources to produce goods.

Significance of Gross Profit Margin in Assessing Profitability

The gross profit margin is a critical financial metric as it sheds light on the company's financial health. A higher margin suggests that the company is selling its goods at a higher markup, contributing to healthier profits. It reflects the company's ability to control production costs and manage pricing strategies effectively. It is a key indicator used by investors and analysts to compare profitability with competitors and make informed investment decisions.