Cushman Company had $824,000 in sales, sales discounts of $12,360, sales returns and allowances of $18,540, cost of goods sold of $391,400, and $283,455 in operating expenses. Gross profit equals:
Multiple Choice
A $793,100.
B $118,245.
C $401,700.
D $414,060.
E $420,240.
The correct answer and explanation is :
Let’s work through it carefully:
Step 1: Calculate Net Sales
Net Sales = Sales – Sales Discounts – Sales Returns and Allowances
Net Sales = $824,000 – $12,360 – $18,540
Net Sales = $793,100
Step 2: Calculate Gross Profit
Gross Profit = Net Sales – Cost of Goods Sold
Gross Profit = $793,100 – $391,400
Gross Profit = $401,700
Thus, the correct answer is:
✅ C. $401,700
Detailed 300-Word Explanation:
Gross profit is a key measure of a company’s profitability that shows how much money a company makes from its sales after deducting the cost of goods sold (COGS). It does not include operating expenses, taxes, or other costs. It only focuses on the core relationship between what you sell and what it costs you to produce or purchase the goods you sold.
First, you must determine the company’s net sales because sales discounts and sales returns reduce the actual revenue a business brings in.
- The company had total sales of $824,000.
- From that, you subtract sales discounts of $12,360 and sales returns and allowances of $18,540.
- This gives a net sales figure of $793,100.
Next, you need to find the gross profit:
- You subtract the cost of goods sold (COGS) from the net sales.
- COGS is $391,400 for Cushman Company.
- So, $793,100 (Net Sales) – $391,400 (COGS) = $401,700 (Gross Profit).
It is important to notice that operating expenses (like salaries, rent, utilities) are not included when calculating gross profit. They would be subtracted later when calculating operating income or net income.
Gross profit is a critical indicator for understanding how efficiently a company produces or sources its products and how much is left over to cover other expenses and profits.