CPIM Practice Exam

What does gross margin represent in financial terms?

1. The total cost of goods sold

2. The difference between total revenue and the cost of goods sold

3. The net income after all expenses are deducted

4. The total expenses incurred during a period

The correct answer is: The difference between total revenue and the cost of goods sold

Gross margin represents the difference between total revenue and the cost of goods sold. This financial metric is key for understanding how efficiently a company is producing and selling its products. By subtracting the cost of goods sold from total revenue, gross margin illustrates how much money is left over to cover other operating expenses and to contribute to the company’s profit. A higher gross margin indicates a more profitable product line, reflecting good pricing power, effective cost management, or both. This distinction is crucial as gross margin does not consider other operating expenses or income, making it a specific metric that focuses solely on production costs relative to revenue. This clarity helps businesses analyze their core profitability and pricing strategies effectively.