DECA Retail Merchandising Practice Exam

What formula is used to calculate profit margin in retail?

1. Net sales / Total assets

2. Cost of goods sold / Average inventory

3. Profit margin / Net sales x 100

4. Current assets / Current liabilities

The correct answer is: Profit margin / Net sales x 100

The formula used to calculate profit margin in retail is derived by taking profit margin and dividing it by net sales, then multiplying by 100 to express it as a percentage. This is essential for understanding how much of each dollar of sales is profit after accounting for costs. The profit margin gives retailers insight into their pricing strategy and operational efficiency, illustrating how effectively they convert sales into profits. The other options focus on different financial metrics. Net sales divided by total assets relates to asset efficiency and return on assets, while the cost of goods sold divided by average inventory assesses inventory turnover rather than profitability. Current assets over current liabilities measures liquidity, indicating a company's ability to cover short-term obligations. These metrics, while important in their own contexts, do not directly indicate profit margin. The correct Choice emphasizes the relationship between profit and sales, which is crucial for evaluating the performance of a retail business.