Explanation:

Gross profit margin is calculated as: $\text{Gross Profit Margin} = \frac{\text{Gross Profit}}{\text{Sales}} = \frac{\text{Sales} - \text{Cost of Sales}}{\text{Sales}}$

Let's calculate for each company:

Company A:

• Sales: $40,000
• Cost of sales: $21,000
• Gross profit = $40,000 - $21,000 = $19,000
• Gross profit margin = $19,000 / $40,000 = 0.475 or 47.5%

Company B:

• Sales: $200,000
• Cost of sales: $110,000
• Gross profit = $200,000 - $110,000 = $90,000
• Gross profit margin = $90,000 / $200,000 = 0.45 or 45.0%

Company C:

• Sales: $450,000
• Cost of sales: $240,000
• Gross profit = $450,000 - $240,000 = $210,000
• Gross profit margin = $210,000 / $450,000 = 0.4667 or 46.67%

Comparison:

• Company A: 47.5%
• Company B: 45.0%
• Company C: 46.67%

Company A has the highest gross profit margin at 47.5%, followed by Company C (46.67%), and then Company B (45.0%).

Key Points:

• Gross profit margin measures the percentage of revenue remaining after deducting the cost of goods sold.
• It's a fundamental profitability metric that shows how efficiently a company produces and sells its products.
• Higher gross margins indicate better pricing power, production efficiency, or lower input costs.
• Note that other expenses (SG&A, operating expenses, interest, taxes) are not included in gross profit margin calculation.