Gross profit margin measures profitability after deducting which costs?

• A. After deducting operating expenses.
• B. After deducting taxes.
• C. After deducting cost of goods sold.
• D. Before any costs.

Answer: (C)

Gross profit margin shows profitability after removing the direct costs of producing goods. It is calculated using gross profit, which equals net sales minus cost of goods sold, divided by net sales. Cost of goods sold covers the direct costs tied to making the product—materials, direct labor, and allocated production overhead. By subtracting only these production costs, the margin reflects how efficiently production and pricing cover those basics, independent of other expenses.

Operating expenses are not included in COGS, so subtracting them would give the operating margin, not the gross margin. Taxes affect net profit, so subtracting taxes yields the net margin. A notion like “before any costs” isn’t a standard profit measure, since margins are defined after removing the relevant costs.