Which two items are used to calculate Gross Profit?

Which two items are used to calculate Gross Profit?

• A. Revenue and COGS
• B. Revenue and Expenses
• C. COGS and Expenses
• D. Net Profit and Revenue

Answer: (A)

Gross profit is Revenue minus the cost of goods sold because it shows how much is left from sales after covering the direct costs of producing those goods. Revenue is the total money from selling products, while the cost of goods sold includes the direct materials, direct labor, and other production costs tied to making those goods. Subtracting COGS from Revenue gives the gross profit, a measure of production efficiency before any operating expenses. Using Revenue with Expenses would give net profit, since expenses include overhead and other costs beyond production. Pairing COGS with Expenses doesn’t isolate profit at all, and using Net Profit with Revenue mixes in all expenses, not just production costs. Therefore, Revenue and COGS is the correct combination for gross profit.

Gross profit is Revenue minus the cost of goods sold because it shows how much is left from sales after covering the direct costs of producing those goods. Revenue is the total money from selling products, while the cost of goods sold includes the direct materials, direct labor, and other production costs tied to making those goods. Subtracting COGS from Revenue gives the gross profit, a measure of production efficiency before any operating expenses. Using Revenue with Expenses would give net profit, since expenses include overhead and other costs beyond production. Pairing COGS with Expenses doesn’t isolate profit at all, and using Net Profit with Revenue mixes in all expenses, not just production costs. Therefore, Revenue and COGS is the correct combination for gross profit.