What is the gross profit ratio for the business?
Understand the Problem
The question is asking for the gross profit ratio of a business based on provided financial information. To find this, we need to calculate the gross profit first and then divide it by the sales, according to the given formula in the additional information.
Answer
$67\%$
Answer for screen readers
The gross profit ratio for the business is $67%$.
Steps to Solve
- Identify the required values
From the financial information provided, we note the values:
- Sales = $600,000
- Cost of goods sold (COGS) = $200,000
- Calculate Gross Profit
Gross Profit is calculated using the formula:
$$ \text{Gross Profit} = \text{Sales} - \text{Cost of Goods Sold} $$
Substituting the values we identified:
$$ \text{Gross Profit} = 600,000 - 200,000 $$
- Determine Gross Profit
Calculating the gross profit:
$$ \text{Gross Profit} = 400,000 $$
- Calculate Gross Profit Ratio
The Gross Profit ratio is calculated using the formula:
$$ \text{Gross Profit Ratio} = \frac{\text{Gross Profit}}{\text{Sales}} $$
Substituting the values:
$$ \text{Gross Profit Ratio} = \frac{400,000}{600,000} $$
- Calculate and convert to percentage
Now calculating the ratio:
$$ \text{Gross Profit Ratio} = \frac{400,000}{600,000} = 0.6667 $$
To express it as a percentage, multiply by 100:
$$ \text{Gross Profit Ratio} = 0.6667 \times 100 = 66.67% $$
This is approximately 67%.
The gross profit ratio for the business is $67%$.
More Information
The gross profit ratio is an important indicator of a business's financial health as it illustrates how efficiently a company can produce and sell its goods. A higher ratio indicates better profitability.
Tips
- Forgetting to subtract COGS from sales: This is essential to calculate gross profit correctly.
- Not converting the ratio to a percentage correctly: Remember to multiply by 100 after dividing.