Question

Please answer the following question in 175 word response:

Can you explain the gross profit ratio and why it is so important to organizations?

Answer 1

What Is Gross Profit Ratio

Gross Profit Is the Difference Between Net Sales Revenue And Cost Of Sales . Therefore Gross Profit Ratio Means The Amount Of Gross Profit Realized As A Percentage Of Revenue From Operations .This Ratio Is Calculated As Follows:

Gross Profit Ratio = (Gross Profit/Net Sales Revenue Of Operations) × 100

Importance Of Gross Profit Ratio

· It Identifies The Efficiency Of The Organization Concern And Also Performance Of Organization’s Sales And Its Production

· Low Gross Profit Ratio Indicates The Lower Efficiency Of The Organization Concern and viceversa.

· The Reason For Low Gross Profit Ratio Due To The High Cost Of Goods Sold Which May Be Due To Unfavorable Purchasing Policies, Poor sales, Reduced Selling Price, Stiff Competition In The Market, Poor Canvassing, Etc.

· Sometimes, High Gross Profit Ratio Is Possible Due To Over Valuation Of Closing Stock/ Under Valuation Of Opening Stock

· It Helps To Look Out Effectiveness Of Individual Goods Or Services .The Gross Profit Of One Good / Service Divided By The Total Revenue Generated By That Good / Product Will Display The Efficiency Of The Process