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CFA Level I · CFA Level I Exam · Company Analysis: Past, Present, and Future

A company reports revenue of 500 million, cost of goods sold of 300 million, and operating expenses of 120 million in Year 1. In Year 2, revenue is 600 million, cost of goods sold is 372 million, and operating expenses are 138 million. Which of the following changes in margins from Year 1 to Year 2 is most accurate?

Both margins fell. Gross margin went from 40% to 38% and operating margin from 16% to 15%. Absolute profits rose, but costs grew faster than revenue as a proportion, which is why margins declined.

  1. AGross margin fell and operating margin fellCorrect
  2. BGross margin rose and operating margin rose
  3. CGross margin fell and operating margin rose

Explanation

Year 1 gross margin = 200/500 = 40%; operating margin = 80/500 = 16%. Year 2 gross margin = 228/600 = 38%; operating margin = 90/600 = 15%. Both margins fell even though absolute profit rose.

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