Which term describes the percentage of sales that remains as profit after deducting all expenses?

• A. Gross margin
• B. Net income
• C. Return on investment
• D. Profit margin

Answer: (D)

Profit margin is the percentage of each sales dollar that remains as profit after all expenses are paid. It answers how much profit is earned from revenue, not just the dollar amount of profit. You calculate it by dividing net income by net sales and multiplying by 100. This differs from gross margin, which only subtracts the cost of goods sold and ignores all other expenses; net income is the actual dollar profit, not a percentage; and return on investment compares profit to the capital invested rather than to sales. So the term that best describes profit as a percentage of sales after every expense is the profit margin. For example, if sales are $200 and total expenses are $160, net income is $40, and the profit margin is 40/200 = 20%.