Utah Contractor Practice Exam

What is gross profit?

1. Net profit minus total expenses

2. Sales minus Cost of goods sold

3. Overhead costs

4. None of the above

The correct answer is: Sales minus Cost of goods sold

Gross profit is calculated as sales revenue minus the cost of goods sold (COGS). This figure represents the amount of money a company makes from its sales after deducting the direct costs associated with producing those goods. Gross profit is important because it provides insight into the company's efficiency in manufacturing and selling its products, as well as the markup on those goods. The other choices describe different financial metrics. Net profit, for example, accounts for total expenses in addition to the cost of goods sold, providing a broader picture of a company's profitability after all expenses are considered. Overhead costs refer to indirect expenses not directly associated with production, such as utilities or rent, and thus do not define gross profit. Therefore, the definition given in the correct answer accurately reflects the formula used to determine gross profit effectively.