Gross profit rate means the gross profit expressed as a percentage, by dividing the amount of gross profit by net sales.
To do so, we divide the amount of gross profit by net sales. For PW Audio, the Gross profit rate is 31.3%, computed as follows.
Gross profit Net sales = Gross profit rate
$144,000 $460,000 = 31.3%
Gross profit represents the "merchandising profit" of a company. It is not a measure of the overall profitability, because operating expenses are not yet deducted. But managers and other interested parties closely watch the amount and trend of gross profit. They compare current gross profit with amounts reported in past periods. They also compare the company’s gross profit rate with rates of competitors and with industry averages. Such comparisons provide information about the effectiveness of a company’s purchasing function and the soundness of its pricing policies.