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CMA Intermediate · Financial Management and Business Data Analytics · Comparative, Common-Size Financial Statements and Trend Analysis

Aarav Pharma Ltd. has a common-size income statement for two years. Year 1: net sales 100%, cost of goods sold 60%, other expenses 25%. Year 2: net sales Rs 12,00,000 (Year 1 Rs 10,00,000), COGS Rs 7,80,000, other expenses Rs 2,88,000. Ignoring tax and interest, by how many percentage points did net profit margin change from Year 1 to Year 2?

Net margin fell by 4 percentage points. Year 1 margin was 15% (100 less 60 less 25). In Year 2, profit is Rs 1,32,000 on sales of Rs 12,00,000, which is 11%. The difference is a decline of 4 points.

  1. AIncrease of 2 points
  2. BDecrease of 2 pointsCorrect
  3. CDecrease of 4 points
  4. DIncrease of 4 points

Explanation

Year 1 margin = 100 - 60 - 25 = 15%. Year 2 COGS = 7,80,000/12,00,000 = 65%; other expenses = 2,88,000/12,00,000 = 24%; margin = 100 - 65 - 24 = 11%... check profit: 12,00,000 - 7,80,000 - 2,88,000 = 1,32,000, which is 11%. Change = 11 - 15 = -4 points, so the decrease of 4 points is correct.

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