Gross margin is calculated by subtracting
Select one:
A. Total manufacturing overhead costs from total revenues.
B. Fixed costs from total revenues.
C. Cost of goods sold from total revenues.
D. Total variable costs from total revenues.
The correct answer and explanation is:
The correct answer is C. Cost of goods sold from total revenues.
Explanation:
Gross margin is a financial metric that measures the profitability of a company after accounting for the direct costs of producing goods or services. It is calculated by subtracting the cost of goods sold (COGS) from total revenues. The formula for gross margin is:
Gross Margin = Total Revenues – Cost of Goods Sold (COGS)
- Total Revenues: This refers to the income a company earns from selling its products or services. It represents the total amount of money received before any costs or expenses are deducted.
- Cost of Goods Sold (COGS): COGS includes all direct costs involved in the production of the goods or services that a company sells. This typically includes costs like raw materials, labor, and manufacturing expenses directly tied to the production process.
By subtracting COGS from total revenues, the gross margin reveals how much money remains to cover other operating expenses, such as sales and marketing costs, administrative expenses, interest, and taxes. The higher the gross margin, the more efficiently a company produces and sells its goods, because it indicates a larger proportion of revenues is available to cover non-production-related costs.
It is important to note that gross margin does not account for fixed or variable costs unrelated to the production process. It focuses only on the cost of producing goods or services and how that impacts profitability at a basic level.
In summary, gross margin provides valuable insights into a company’s ability to generate profit from its core operations, and it is a key metric used by analysts and managers to assess business performance.