What financial metric directly affects a shop's profitability by showing the cost directly tied to goods sold?

The cost of goods sold (COGS) is a crucial financial metric that directly affects a shop's profitability because it represents the total direct costs attributable to the production of the goods sold by the business. This includes expenses such as materials, labor, and any other costs directly associated with manufacturing or acquiring the products that the shop sells. By understanding COGS, businesses can determine their gross profit, which is the revenue from sales minus COGS. This relationship is essential for assessing how much money the shop makes from selling products after covering the costs of those products.

In contrast, while gross profit indicates profitability, it is contingent on knowing COGS. Net revenue pertains to total income after deducting sales returns and allowances but does not show the direct costs related to goods sold. Operating expenses represent costs necessary to run the business aside from direct costs of goods and do not directly factor into product profitability in the same way that COGS does. Thus, COGS is the most relevant metric when analyzing the impact of product costs on profitability.