What does gross profit measure?

Gross profit specifically measures the difference between a company's revenue and the direct costs associated with producing the goods or services it sells, which is referred to as the Cost of Goods Sold (COGS). This financial metric provides insight into how efficiently a company is producing its products relative to its sales revenue. By subtracting COGS from total revenue, businesses can assess their profitability at a primary operational level, excluding overhead and other indirect costs.

Understanding gross profit is crucial for evaluating a company's financial health because it highlights the basic profitability derived from core operations before any additional expenses (like administrative costs, taxes, or interest) are considered. This measure is often used to make crucial decisions regarding pricing, production efficiency, and overall business strategy.

In contrast, other choices involve calculations that do not pertain to measuring gross profit. Revenue minus total expenses represents net profit, which includes all costs, not just the direct production costs. Revenue divided by total sales is essentially a formula for calculating a ratio that may provide some context on sales performance but does not reflect profitability. Finally, total assets minus total liabilities calculates net worth or equity, which is unrelated to profit measurement. Therefore, B is the correct choice for defining gross profit accurately.