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A company reports the following amounts at the end of the year: Compute the company's gross...

Question:

A company reports the following amounts at the end of the year:

Sales revenue $320,000
Cost of goods sold 205,000
Net income 55,000

Compute the company's gross profit ratio.

Gross Profit Ratio

The gross profit ratio is a ratio that shows the relationship between a company's gross profit and its sales revenue. This profitability ratio is calculated by dividing gross profit with sales revenue. Gross profit is the amount of profit that a company generates after deducting the cost of goods from its sales revenue. Gross profit is the amount available that is to be deducted for selling, distribution, and administrative costs to calculate for net income.

Answer and Explanation:

The gross profit ratio is calculated as follows:

  • Gross profit ratio = (Gross profit / Sales revenue) * 100

Additionally, gross profit is computed as follows:

  • Gross profit = Sales revenue - Cost of goods sold
  • Gross profit = $320,000 - $205,000
  • Gross profit = $115,000

Consequently, the gross profit ratio can now be calculated.

  • Gross profit ratio = ($115,000 / $320,000)
  • Gross profit ratio = 35.9375%

The company's gross profit ratio is 35.9375%


Learn more about this topic:

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How to Calculate Gross Profit Margin: Definition & Formula

from Financial Accounting: Help and Review

Chapter 5 / Lesson 17
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