CPIM Practice Exam

How is profit margin defined in traditional accounting terms?

1. The total revenue generated from sales

2. The selling price minus the total costs involved in production

3. The net profit before taxes and expenses

4. The difference between sales and cost of goods sold

The correct answer is: The difference between sales and cost of goods sold

Profit margin in traditional accounting terms is defined as the difference between sales and the cost of goods sold (COGS). This measure is commonly used to indicate how efficiently a company converts sales into actual profit, reflecting the amount of money that remains after the costs of producing or purchasing the goods sold are deducted from revenue. This calculation allows businesses to assess their profitability related specifically to their core business operations, excluding other expenses such as selling, general and administrative expenditures, taxes, and interest. Therefore, when analyzing profit margin, focusing on the relationship between sales revenue and the cost directly tied to the production of goods provides a clear picture of operational efficiency. Other options do not accurately define profit margin. For example, total revenue generated from sales refers only to income without considering costs, while the selling price minus total costs incorrectly implies inclusion of all costs, not just those directly related to production. Lastly, net profit before taxes and expenses does not isolate the costs involved in producing goods, thus not conforming to traditional profit margin calculation standards.