Financial information is presented below:
Operating expenses $ 42,000
Sales returns and allowances 12,000
Sales discounts 3,000
Sales revenue 165,000
Cost of goods sold 96,000
Gross profit would be
a. $54,000.
b. $57,000.
c. $69,000.
d. $66,000.
The correct answer and explanation is :
To calculate gross profit, we need to use the following formula:
Gross Profit = Net Sales – Cost of Goods Sold (COGS)
Step 1: Calculate Net Sales
Net Sales = Sales Revenue – Sales Returns and Allowances – Sales Discounts
[
\text{Net Sales} = \$165,000 – \$12,000 – \$3,000 = \$150,000
]
Step 2: Subtract Cost of Goods Sold (COGS)
[
\text{Gross Profit} = \text{Net Sales} – \text{COGS} = \$150,000 – \$96,000 = \$54,000
]
Correct Answer: a. $54,000
📘 Explanation (Approx. 300 Words):
Gross profit is a key financial metric used to assess a company’s core profitability from its operations. It reflects how efficiently a company is producing and selling its goods. To determine gross profit, we focus solely on the revenue earned from sales and the direct costs incurred in producing the goods sold, without considering operating expenses, taxes, or interest.
The first step in this problem is to determine the net sales, which adjusts the total sales revenue for any sales returns and allowances (goods returned or price reductions) and sales discounts (price reductions offered for early payment). These adjustments reduce the total amount of sales the company actually retains.
Given:
- Sales Revenue: $165,000
- Less: Sales Returns and Allowances: $12,000
- Less: Sales Discounts: $3,000
This gives us a net sales figure of $150,000.
Next, we subtract the cost of goods sold (COGS), which includes the direct costs of producing or purchasing the products sold (e.g., raw materials, labor, manufacturing). In this case, COGS is $96,000.
By subtracting $96,000 from the net sales of $150,000, we arrive at a gross profit of $54,000.
It is important to note that operating expenses ($42,000) are not included in the gross profit calculation. They are used to calculate operating income, which comes later in the income statement.
Understanding gross profit helps businesses evaluate their production efficiency and pricing strategies. A low gross profit might suggest high production costs or poor pricing, while a high gross profit can indicate strong profitability from core operations.