How is net operating income calculated for merchandise sales?

Net operating income (NOI) for merchandise sales is determined by subtracting both the costs associated with producing or acquiring the goods (known as the cost of goods sold) and all operating expenses from total revenue. This calculation provides a clear view of how profitable a business's core operations are before considering non-operating income and expenses.

The rationale for this approach is that it accounts for all costs that are directly associated with the sale of merchandise. By subtracting total costs—comprising both costs of goods sold and additional operating expenses—from revenue, you obtain a figure that accurately reflects the income generated purely from the business's operations, offering valuable insight into operational efficiency and profitability.

In contrast, other choices miscalculate or omit important components necessary for an accurate determination of net operating income, either by not accounting for all costs involved in merchandise sales or by including inappropriate factors that do not relate to core operational profitability.