Certified Supply Chain Professional (CSCP) Practice Exam

How is gross profit calculated?

1. Subtracting total expenses from revenues

2. Subtracting cost of goods sold from revenues

3. Adding cost of goods sold to revenues

4. Calculating total revenue minus total assets

The correct answer is: Subtracting cost of goods sold from revenues

Gross profit is calculated by subtracting the cost of goods sold (COGS) from total revenues. This calculation reflects the company’s ability to sell its products at a profit after accounting for the direct costs associated with producing those goods. Gross profit is a crucial measure as it shows how efficiently a company is producing and selling its goods before other operational expenses are considered. To elaborate further, total revenues represent all income generated from sales, while COGS includes direct costs like materials and labor that are essential to manufacturing the products. By focusing on this subtraction, gross profit provides insight into the core profitability of the company's core business activities. The other options do not correctly represent the calculation of gross profit. Subtracting total expenses from revenues calculates net profit, which considers all operating expenses, taxes, and other overheads, thus providing a broader view of profitability. Adding COGS to revenues does not yield any meaningful financial metric in this context and misrepresents the relationship between revenues and costs. Total revenue minus total assets does not fit into gross profit calculations either, as it mixes different financial categories without relating them directly to the cost of goods sold.