JAMB Accounts Principles of Accounts 2016 Paper

Concept:The ratio that shows how effectively sales cover the direct cost of goods sold is the gross profit margin.Explanation:Cost of goods sold represents the direct expenses incurred in producing the goods that a firm sells. To measure sales efficiency against this cost, we compare gross profit with sales revenue.Gross profit is calculated as:$$\text{Gross Profit} = \text{Sales} - \text{Cost of Goods Sold}$$Therefore, the gross profit margin is:$$\text{Gross Profit Margin} = \frac{\text{Gross Profit}}{\text{Sales}} \times 100\%$$This margin specifically shows how much profit is earned from sales before other operating expenses are deducted.Return on capital employed and return on equity measure profits relative to invested capital, not directly against cost of goods sold.Net profit margin includes all expenses, so it is not limited to the relationship between sales and cost of goods sold.Hence, the correct indicator is the gross profit margin.Answer:B. gross profit margin