How is the Gross Margin Ratio calculated?

The Gross Margin Ratio is a key financial metric that measures the percentage of revenue that exceeds the cost of goods sold (COGS). This ratio is essential for understanding how efficiently a company uses its resources to produce goods and manage its pricing strategy.

The correct formula for calculating the Gross Margin Ratio is derived from determining the gross profit and then expressing it as a percentage of net sales. Specifically, it is calculated by taking the difference between net sales and COGS, which provides gross profit, and then dividing that figure by net sales. The formula reflects how much of each dollar of sales contributes to covering other expenses and generating profit, which is vital for assessing a company's profitability.

Using option B, the calculation can be visualized as follows:

1. Subtract the Cost of Goods Sold from Net Sales to find the gross profit.
2. Divide the gross profit by Net Sales to find the ratio as a percentage.

This ratio helps companies analyze their pricing strategies and overall profitability, indicating how much revenue is kept after accounting for the direct costs associated with the production of goods sold. Thus, understanding and applying this measurement is crucial for financial analysis and decision-making in accounting and finance.