How do you calculate Gross Profit?

Gross Profit is calculated by subtracting the Cost of Goods Sold (COGS) from total revenue or sales. This metric is essential for understanding a company's profitability on its core operations because it reflects the income generated from selling products or services after accounting for the direct costs associated with producing those goods or services.

When using Income as a term, it often refers to total revenue but may create ambiguity without specifying that it relates to sales revenue specifically. COGS includes all costs that are directly linked to the production of goods sold by the company, such as raw materials and labor. The distinction between gross profit and other forms of profit is crucial; gross profit specifically focuses on the efficiency of production and selling, while other profit metrics, such as net profit, account for all expenses including operating and overhead costs.

The other choices involve various forms of expenses or costs that do not align with the standard definition of gross profit. For example, using total expenses or operating costs would not give a clear picture of profitability from core operations, as they include indirect costs not related to production. Therefore, the correct method to derive gross profit is indeed by subtracting COGS from revenue.