Which formula represents profit margin?

• A. Net income / Net sales
• B. Net sales / Net income
• C. Gross profit / Net sales
• D. Operating income / Net sales

Answer: (A)

Profit margin shows how much of each sales dollar remains as profit after all expenses. The way to express it is net income divided by net sales. Net income is the bottom-line profit after taxes, interest, and all operating expenses. Net sales are the revenue after refunds, returns, and discounts. So net income / net sales gives the percentage of sales that becomes profit.

Other formulas describe different margins: gross margin uses gross profit (net sales minus cost of goods sold) divided by net sales, reflecting profitability after production costs but before other expenses. Operating margin uses operating income divided by net sales, showing profitability from core operations before interest and taxes. Reversing the ratio would not measure profitability as a margin.