Which of the following is the correct formula for calculating net profit margin?

• A. \( \text{Net Profit Margin} = \frac{\text{Operating Income}}{\text{Net Sales}} \times 100 \)
• B. \( \text{Net Profit Margin} = \frac{\text{Gross Profit}}{\text{Net Sales}} \times 100 \)
• C. \( \text{Net Profit Margin} = \frac{\text{Net Sales}}{\text{Net Income}} \times 100 \)
• D. \( \text{Net Profit Margin} = \frac{\text{Net Income}}{\text{Net Sales}} \times 100 \)

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of Net Profit Margin. It is a financial metric that shows the percentage of net income generated from net sales, indicating the profitability of a company.
2. Step 2: Recall the formula for Net Profit Margin. The correct formula is: \( \text{Net Profit Margin} = \frac{\text{Net Income}}{\text{Net Sales}} \times 100 \). This formula calculates the proportion of net income relative to net sales, expressed as a percentage.
3. Step 3: Analyze the incorrect options provided. Option 1 uses Operating Income instead of Net Income, which measures operational profitability but not overall profitability. Option 2 uses Gross Profit, which excludes operating and other expenses, making it unsuitable for calculating net profit margin. Option 3 reverses the numerator and denominator, which is mathematically incorrect for this metric.
4. Step 4: Confirm the correct formula. Net Profit Margin focuses on Net Income (total profit after all expenses, taxes, and costs) divided by Net Sales (total revenue after returns and allowances). Multiplying by 100 converts the ratio into a percentage.
5. Step 5: Apply the formula in practice. To calculate Net Profit Margin, ensure you have accurate values for Net Income and Net Sales from the financial statements. Plug these values into the formula and perform the calculation to determine the percentage.