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ACCA Applied Knowledge · Financial Accounting · Analysis of financial statements

A company's gross profit margin rose from 30% to 35%, but its net profit margin fell from 12% to 9%. Which of the following is the most likely explanation?

The most likely explanation is that operating expenses have risen as a percentage of revenue. Gross margin improved, so cost of sales is not the cause, yet net margin fell, meaning expenses below gross profit have grown faster than revenue.

  1. AOperating expenses have increased as a percentage of revenueCorrect
  2. BCost of sales has increased as a percentage of revenue
  3. CInventory turnover has improved significantly
  4. DRevenue has fallen while costs remained fixed

Explanation

Gross margin improved by 5 percentage points, so cost of sales fell relative to revenue. Net margin fell by 3 points, so expenses below gross profit (distribution, administration, finance costs) must have risen by about 8 points of revenue. Option B contradicts the improved gross margin.

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