The average spread between the cost of goods sold and the sales revenue is indicated by :
Gross Profit ratio
Option 2 — Gross Profit ratio is correct.
The gross profit ratio measures the margin left after the direct cost of goods sold (COGS) is deducted from net sales. It is computed as \( \text{Gross Profit Ratio} = \dfrac{\text{Sales} - \text{COGS}}{\text{Sales}} \times 100 \). Because it captures exactly the "spread" between what a firm pays to make/buy its goods and what it charges customers, it is the truest indicator of the average trading margin on sales.
A higher gross profit ratio signals efficient production/procurement and strong pricing power, while a falling ratio warns of rising input costs or price erosion.
Why the other options are wrong:
| Ratio | What it measures |
|---|---|
| Operating Expense ratio | Operating costs (admin, selling) as a share of sales — not the COGS spread |
| Net Profit ratio | Profit after all expenses, interest and tax — a bottom-line measure |
| Return on Equity | Profit earned on shareholders' funds — a return, not a sales margin |
Takeaway: The gap between COGS and sales revenue is precisely the gross profit ratio.
Similar Questions
If the selling price of a product (per unit) is ₹ 20, variable cost (per unit) is ₹ 14, fixed factory overheads (per year) is ₹ 5,40,000 and fixed selling overheads is ₹ 2,52,000, the break-even in terms of sales volume and the number of units to be sold to earn a profit of ₹ 60,000 will be which one of the following?
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