Future Business Leaders of America (FBLA) Agribusiness Practice Test

What does gross margin represent?

1. The total revenue of a business

2. What remains after subtracting the cost of goods sold from revenues

3. The overall profit after operating expenses

4. The total liabilities of a business

The correct answer is: What remains after subtracting the cost of goods sold from revenues

Gross margin is a financial metric that reflects the profitability of a business by showing what remains after subtracting the cost of goods sold (COGS) from total revenues. It is an important indicator for assessing how efficiently a company is using its resources to generate profit from its core business activities. The calculation focuses specifically on the direct costs associated with producing goods, providing insight into the relationship between sales and production costs. By highlighting the difference between what a company earns from sales and what it spends directly on production, gross margin provides a clear picture of how well a company is managing its production costs relative to its sales revenue. This metric is crucial for decision-making related to pricing strategies and cost management, enabling businesses to evaluate their financial health and operational efficiency. Understanding gross margin is essential for analyzing business performance, making it a key concept in financial analysis and strategies aimed at improving profitability.