Which statement about gross margin is true?

• A. It equals net income minus operating expenses.
• B. It equals revenue minus cost of goods sold.
• C. It equals selling price minus freight.
• D. It equals revenue minus operating expenses.

Answer: (B)

Gross margin shows how much revenue remains after paying the direct costs to produce the goods sold. It is calculated by subtracting the cost of goods sold from revenue. This figure reveals the profitability of core production before considering other costs like selling, general, and administrative expenses, taxes, and interest. For example, if revenue is 500,000 and cost of goods sold is 320,000, gross margin is 180,000 (or 36% of revenue when expressed as a percentage). The other statements aren’t describing this metric: revenue minus operating expenses yields operating income, not gross margin; net income minus operating expenses isn’t a standard measure and mixes various costs; and selling price minus freight doesn’t reflect the production costs that COGS covers.