How is the gross profit ratio calculated?



Q15. Gross profit ratio
How is the gross profit ratio calculated?

A15.
Gross profit ratio
= Gross profit / Sales
= (Sales – Cost of goods sold) / Sales

[Entity 15-a]
Sales = $860,000
Cost of goods sold = $602,000
Gross profit = $258,000
Gross profit ratio
= $258,000 / $860,000 = 30%

[Entity 15-b]
Sales = $720,000
Cost of goods sold = $468,000
Gross profit = $252,000
Gross profit ratio
= $252,000 / $720,000 = 35%

[Note]
Higher gross profit ratio –> more profitable.
Thus in this example, Entity 15-b is more profitable than Entity 15-a.

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