Fundamentals of Business Intelligence (FBI) Practice Exam

Which of the following best defines the term "Gross Profit Margin"?

1. Revenue minus operating expenses

2. Net Sales divided by total liabilities

3. Net Sales minus Cost of Goods Sold

4. Cost of Goods Sold divided by Net Sales

The correct answer is: Net Sales minus Cost of Goods Sold

The term "Gross Profit Margin" is best defined as the difference between net sales and the cost of goods sold (COGS). This metric reflects the amount of money a company retains after incurring the direct costs associated with producing the goods it sells. Calculating it involves taking net sales, which is the total sales revenue minus any returns, allowances, or discounts, and subtracting COGS, which includes all direct costs attributable to the production of those goods. This calculation is significant because it provides insight into the profitability of a company's core business activities, excluding indirect costs and other expenses. A higher gross profit margin indicates a more efficient production process or a stronger positioning in the marketplace, while a lower margin may highlight issues related to pricing strategy or cost controls. Understanding gross profit margin is crucial for businesses as it aids in pricing decisions, cost management, and financial analysis. It also allows investors and stakeholders to assess a company's financial health and operational efficiency.