CFA Level I · CFA Level I Exam · Financial Analysis Techniques
An analyst compares two retailers. Retailer X has a gross profit margin of 35% and Retailer Y has a gross profit margin of 28%. Both report the same revenue. Which statement about the operating profit margin of the two retailers is most likely accurate?
Retailer X could still have the lower operating margin. Operating margin is gross margin minus operating expenses as a share of revenue, so a higher gross margin can be offset by proportionally larger operating costs. Gross margin alone does not determine operating or net profitability.
- ARetailer X must have the higher operating profit margin.
- BRetailer X could have the lower operating profit margin if its operating expenses are proportionally higher.Correct
- CRetailer Y must have the lower net profit margin.
Explanation
Operating margin equals gross margin less operating expenses as a percentage of revenue. A higher gross margin can be offset by larger selling, general and administrative costs, so Retailer X could still have the lower operating margin. The other statements wrongly assume that gross margin alone determines lower-level margins.
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