DECA Retail Merchandising Practice Exam

Which financial performance indicator focuses on the revenue from sales after the cost of goods sold has been deducted?

1. Operating Profit Margin

2. Net Profit

3. Gross Margin

4. Return on Equity

The correct answer is: Gross Margin

The correct choice is focused on the concept of Gross Margin, which is a key financial performance indicator that assesses the profitability of a company's core activities by evaluating the revenue generated from sales after subtracting the cost of goods sold (COGS). Gross Margin demonstrates how much money is left over from sales to cover operating expenses, taxes, and other costs, making it a critical metric for understanding the efficiency of a company's production process and overall financial health. Gross Margin is typically expressed as a percentage, indicating how much of each dollar earned from sales is retained after covering the direct costs associated with producing goods. A higher Gross Margin suggests better financial health and pricing strategies, which can be crucial for retailers and businesses looking to optimize their profitability. In contrast, other financial indicators like Operating Profit Margin, Net Profit, and Return on Equity cover different aspects of a company's financial performance. Operating Profit Margin looks at profits from operations, Net Profit concerns the total profitability after all expenses (including operating and non-operating costs), and Return on Equity focuses on the profitability relative to shareholders’ equity. Each of these indicators serves its specific purpose and provides valuable insights but does not specifically isolate revenue remaining after the cost of goods sold, which is the essence of Gross Margin.