How is gross margin defined?

Gross margin is defined as the final sales price minus the cost of goods sold. This calculation represents the amount that a business retains after covering the direct costs associated with the production of its goods or services. It is essential in assessing a company's financial health, as it indicates how much money is available to cover operating expenses, investments, and profits after accounting for the costs of the merchandise sold.

Understanding gross margin is critical for merchandising and inventory management because it directly influences pricing strategies and overall profitability. A higher gross margin indicates more effective cost management and pricing strategies, allowing for greater flexibility in operations and potentially higher net profits.

The other definitions provided do not capture the essence of gross margin, as they refer to different financial metrics. Total revenue generated by sales pertains to the overall income before any costs are deducted, while the difference between wholesale costs and retail prices relates more to markups than to gross margin. Lastly, net profit after all expenses is a broader metric that considers all operating expenses and not just the costs tied to goods sold.