What is the equation used to calculate gross margin?

The equation to calculate gross margin is determined by subtracting the cost of goods sold (CGS) from net sales. This calculation focuses on the profitability of a company's core activities, specifically how much revenue is left after accounting for the direct costs associated with producing the goods that a business sells.

Gross margin is vital for assessing a company's financial health and understanding its ability to cover its operational expenses and generate profit from its core operations. The formula reflects the company's efficiency in managing production costs relative to its sales revenue.

Each of the other options does not accurately reflect the calculation of gross margin. The net sales minus operating expenses, for instance, would give you operating income rather than gross margin, as it includes costs beyond just the cost of goods sold. Similarly, gross sales minus returns and allowances adjusts revenue but does not account for the cost side necessary for determining gross margin. Finally, subtracting selling expenses from gross margin is not a relevant calculation for obtaining gross margin itself, as it involves additional operational costs that follow the gross margin calculation.