How is gross profit calculated?

Gross profit is an important financial metric that reflects the profitability of a company's core operations. It is calculated by taking total sales and subtracting the costs of goods sold (COGS). This calculation focuses on the direct costs associated with the production of goods or services that a company sells. By using this method, businesses can ascertain how efficiently they are producing their goods compared to their sales revenue.

For example, if a company sells products for $100,000 and incurs $60,000 in costs directly associated with the production of those goods, the gross profit would be $40,000. This number serves as an indicator of how well a company generates revenue relative to its direct costs and is crucial for assessing the health of a business's operations.

The other options provided do not accurately reflect the definition of gross profit. Marketing costs and operating expenses relate to other aspects of business expenses but are not included in the calculation of gross profit. Similarly, total liabilities are unrelated to gross profit, as they pertain to the overall obligations a company has and not to the revenue-generating activities directly linked to COGS. Therefore, the correct calculation of gross profit focuses solely on the relationship between total sales and the costs directly incurred to achieve those sales.