Fundamentals of Business Intelligence (FBI) Practice Exam

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What is the formula for Gross Profit Margin?

(Net Sales + Cost of Goods Sold) / Net Sales
(Net Sales - Cost of Goods Sold) / Net Sales
Cost of Goods Sold / Net Sales
(Cost of Goods Sold + Net Sales) / 2

The correct answer is: (Net Sales - Cost of Goods Sold) / Net Sales

The formula for Gross Profit Margin is represented as (Net Sales - Cost of Goods Sold) / Net Sales. This metric is crucial for understanding how efficiently a company is producing its goods relative to the revenue generated from sales. Gross Profit Margin reflects the proportion of revenue that exceeds the cost of goods sold (COGS), which essentially indicates how much money a company retains from sales after covering the direct costs associated with producing its goods. By using net sales in the denominator, it ensures that the margin is expressed as a percentage of total sales, providing insight into pricing strategy and cost management. The distinction made by the formula shows the effectiveness of a business in converting sales into profit, which is a critical component for assessing overall financial performance.