How is gross profit calculated?

Gross profit is calculated by subtracting the cost of goods sold (COGS) from total revenue. This metric reflects the amount of money a business makes from its core operations after accounting for the direct costs associated with producing the goods or services it sells.

Calculating gross profit in this way is essential for understanding how efficiently a company is producing its goods. It helps in assessing the financial health of the business, determining pricing strategies, and making decisions about production and operational efficiencies. A high gross profit indicates that the company is selling its products at a significantly higher price than the cost of producing them, which is a positive sign for its profitability.

The other methods mentioned in the other choices do not accurately represent how gross profit is derived, thus affirming the correctness of this approach.