What is the key difference between gross margin and operating margin?

The key difference between gross margin and operating margin lies in their calculation and the expenses they consider. Gross margin focuses solely on the revenue generated from sales and the costs directly associated with producing those goods, which are referred to as the cost of goods sold (COGS). Therefore, gross margin is essentially a measure of how efficiently a company produces and sells its products without taking into account other operational costs.

On the other hand, operating margin takes into account not only the cost of goods sold but also includes all operating expenses related to running the business, such as administrative expenses, selling expenses, and other costs that are incurred during operations. This results in a more comprehensive measure of a company's profitability from its core operations.

By concentrating on sales and COGS, the accurate representation of gross margin is highlighted in the correct answer, distinguishing it clearly from operating margin, which factors additional costs. This distinction is crucial for investors and management in analyzing the profitability and operational efficiency of a company.