Explanation:

The gross profit ratio is a profitability ratio that is used to determine the percentage of gross profit earned by a business in relation to its revenue. It is calculated by dividing the gross profit by the revenue from operations and then multiplying by 100. The formula for gross profit ratio is given below:

Gross Profit Ratio = (Gross Profit / Revenue from Operations) x 100

Calculation:

Given, Revenue from operations = 400000 and Gross profit = 25% on cost.

Let's assume that the cost of goods sold is x.

Then the gross profit will be 25% of x, which is 0.25x.

Therefore, the formula for gross profit ratio can be written as:

Gross Profit Ratio = (0.25x / 400000) x 100

Simplifying the above expression, we get:

Gross Profit Ratio = (0.000625x) x 100

Gross Profit Ratio = 0.0625x

Interpretation:

The gross profit ratio for the business is 0.0625x or 6.25%. This means that for every $1 of revenue generated by the business, it earns a gross profit of 6.25 cents. This ratio is an important indicator of the profitability of a business and is often used by investors and analysts to evaluate the financial performance of a company. A high gross profit ratio indicates that the business is able to generate a large amount of gross profit relative to its revenue, which is generally viewed as a positive sign. Conversely, a low gross profit ratio may indicate that the business is facing pricing pressures, rising costs, or other challenges that are affecting its profitability.

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