DECA Retail Merchandising Practice Exam

Which measure indicates that gross margin is larger than net profit margin?

1. Net Profit Margin

2. Gross Margin

3. Operating Profit Margin

4. Return on Investment

The correct answer is: Gross Margin

Gross margin represents the difference between sales and the cost of goods sold, expressed as a percentage of sales. It reflects the efficiency of a company in producing and selling its products. When gross margin is larger than net profit margin, it indicates that a company is able to cover its cost of goods sold successfully, while the net profit margin takes into account all other expenses, including operating expenses, interest, and taxes, which can significantly reduce profitability. In scenarios where gross margin is larger than net profit margin, it suggests that while the company retains a good amount of revenue after covering direct costs, high operating expenses or other costs are impacting the net profit. This situation can arise in businesses with low variable costs but substantial fixed costs or significant overheads. Thus, the correct answer effectively emphasizes the company's overall capability to generate profit from sales before these additional costs are considered.