How is gross margin calculated?

Gross margin is calculated by taking the difference between net sales and the cost of goods sold (COGS), and then dividing that difference by net sales. This formula essentially measures how much money is left after covering the costs directly associated with producing a product or service, which is critical for assessing a company's financial health and pricing strategy.

The correct formulation helps to understand how well a company is managing its production costs in relation to its sales revenue. A higher gross margin percentage indicates that a company retains more on each dollar of sales, which can be reinvested in operations or distributed to shareholders.

This choice accurately reflects the standard calculation used in financial analysis. In contrast, the other options focus on different aspects of profitability but do not specifically address the calculation of gross margin, such as net income or profit measures that relate to overall operational efficiency rather than direct product costs.