CPIM Practice Exam

What is the formula for calculating net profit?

1. (Sales Revenue + True Variable costs) - operating expenses

2. (Sales Revenue - True Variable costs) - operating expenses

3. (Sales costs + Operating expenses) - True Variable costs

4. Sales Revenue - (True Variable costs + operating expenses)

The correct answer is: (Sales Revenue - True Variable costs) - operating expenses

The formula for calculating net profit is correctly represented as Sales Revenue minus True Variable costs, and then that result minus operating expenses. This is significant because net profit is a measure of a company’s profitability after accounting for both its variable costs associated with manufacturing its products or services and the fixed costs of operations. The correct choice captures this relationship accurately by reflecting that sales revenue, which is the total income from goods sold or services provided, must first account for the variable costs tied directly to the production of those goods or services. After assessing the variable costs, subtracting operating expenses provides a holistic view of what remains after all costs have been deducted. This calculation is essential for businesses to understand their financial health and profitability. This approach is fundamental in financial analysis, as it allows management and stakeholders to evaluate the effectiveness of operations and make informed decisions based on the actual profitability of the firm after covering all necessary expenses.