How is operating profit calculated?

Operating profit is calculated by taking gross profit and subtracting operating expenses. Gross profit represents the revenue generated from sales after accounting for the cost of goods sold, which pertains specifically to the direct costs related to production.

Operating expenses include costs such as salaries, rent, utilities, and other overheads that are necessary to run the business but are not directly tied to production. By subtracting these operating expenses from gross profit, you arrive at operating profit, which provides insight into the profitability of the company’s core operations, excluding the impacts of financing and taxation.

This measure is important as it illustrates how well a company is generating profit from its essential business functions and is a critical indicator of operational efficiency. Other options do not define operating profit accurately or focus on different aspects of financial performance.