Knowledge Check 01 Network Systems, Incorporated, had net sales of \( \$ 750,000 \), cost of goods sold of \( \$ 562,500 \), and net income of \( \$ 100,000 \). Its gros margin ratio is closest to:

To calculate the gross margin ratio, you first need to find the gross profit. Gross profit is calculated by subtracting the cost of goods sold (COGS) from net sales. In this case: Gross Profit = Net Sales - COGS Gross Profit = \( \$ 750,000 - \$ 562,500 = \$ 187,500 \) Next, the gross margin ratio is calculated using the formula: Gross Margin Ratio = (Gross Profit / Net Sales) x 100% Gross Margin Ratio = \( (\$ 187,500 / \$ 750,000) \times 100\% \approx 25\% \) So, the gross margin ratio is closest to 25%. Now, regarding the importance of the gross margin ratio, it helps businesses understand how well they are managing their production costs relative to their sales revenue. A higher gross margin indicates a more profitable product or service, which is essential for long-term sustainability. Additionally, understanding gross margin can aid in pricing strategies—knowing your costs allows you to set prices that ensure you cover expenses and generate profit. For instance, if you find your margin is lower than expected, it might be time to reconsider your pricing or explore cost-cutting measures. Adjusting these levers can have a significant impact on your bottom line!