How is gross profit calculated?

Gross profit is calculated as revenue minus the cost of goods sold (COGS). This metric reveals the amount of money a company makes from its direct sales after accounting for the costs directly associated with producing its products or services. By focusing on the costs directly tied to production, gross profit provides insight into the efficiency and profitability of a company's core operations.

This calculation is essential for businesses because it helps them understand their profit margin before considering other operating expenses, taxes, and interest. It also allows for a more precise analysis of how well a company is managing its production costs relative to its sales, which is vital for making strategic business decisions.

The other options do not accurately represent the definition of gross profit. Revenue minus operating income would not give a meaningful measure related to direct costs, while net income minus total expenses does not relate directly to production efficiency. Similarly, total revenue minus net profit fails to provide insight into core operational profitability. Thus, the calculation that accurately reflects how gross profit is derived is based on the revenue and costs directly associated with goods sold.