Which equation represents operating profit?

Operating profit is a key measure of a company's profitability from its core business operations, excluding any income derived from non-operating activities such as investments or sales of assets. It reflects the efficiency of a company in managing its operational costs.

The correct expression for operating profit is derived from taking the gross margin and subtracting selling and administrative expenses. Gross margin refers to the revenue remaining after deducting the cost of goods sold, which gives a clear picture of how much money is generated from sales before accounting for overhead and administrative costs. By then subtracting selling and administrative expenses from this gross margin, you arrive at the operating profit, which indicates how well a company is performing in its primary business operations.

This direct approach to calculating operating profit highlights the operational effectiveness of the business, making it easier to assess company performance without the influence of financing costs or investment income. It prepares investors and management to make informed decisions regarding the company’s profitable core operations.