Define gross margin and how to improve it.

Master Glencoe Entrepreneurship Finance Exam. Enhance your skills with detailed questions and comprehensive explanations. Prepare with confidence for success!

Multiple Choice

Define gross margin and how to improve it.

Explanation:
Gross margin measures how much of each dollar of revenue is left after paying the costs of producing the goods. It shows the efficiency of turning production into profit before other expenses. The right formula is gross margin = (revenue - COGS) / revenue, usually shown as a percentage. This captures gross profit relative to revenue, not just gross profit by itself or net income. It also points to two clear ways to improve it: raise the selling price if possible (pricing power) or reduce the cost of goods sold through cheaper inputs, more efficient production, or better sourcing. The other options miss the essential idea: subtracting COGS from revenue gives gross profit, not the margin; net income divided by revenue is net profit margin, and COGS divided by revenue is the cost percentage, not the margin.

Gross margin measures how much of each dollar of revenue is left after paying the costs of producing the goods. It shows the efficiency of turning production into profit before other expenses. The right formula is gross margin = (revenue - COGS) / revenue, usually shown as a percentage. This captures gross profit relative to revenue, not just gross profit by itself or net income. It also points to two clear ways to improve it: raise the selling price if possible (pricing power) or reduce the cost of goods sold through cheaper inputs, more efficient production, or better sourcing. The other options miss the essential idea: subtracting COGS from revenue gives gross profit, not the margin; net income divided by revenue is net profit margin, and COGS divided by revenue is the cost percentage, not the margin.

More practice questions