A company has $500M in revenue, 40% gross margin, and $120M in operating expenses. What is the operating margin?

How to answer

Gross profit = $500M x 40% = $200M. Operating profit = Gross profit - OpEx = $200M - $120M = $80M. Operating margin = $80M / $500M = 16%. To check: COGS = $500M x 60% = $300M. Revenue ($500M) - COGS ($300M) - OpEx ($120M) = $80M operating profit. The 16% operating margin is healthy for most industries (median S&P 500 is ~13-15%). Key levers to improve: increase gross margin (pricing or procurement savings) or reduce OpEx as a percentage of revenue (scale leverage).

Key idea: Gross profit minus operating expenses, divided by revenue.