CFA Level I · CFA Level I Exam · Financial Analysis Techniques
An analyst converts a company's income statement into a common-size income statement. Revenue is 40,000, cost of goods sold is 26,000, and operating expenses are 8,000. The operating profit margin shown in the common-size statement is closest to:
The operating margin is 15.0%. Operating profit is revenue of 40,000 less cost of goods sold of 26,000 and operating expenses of 8,000, which equals 6,000. Dividing 6,000 by revenue of 40,000 gives 15.0% in a common-size income statement.
- A15.0%Correct
- B35.0%
- C65.0%
Explanation
Operating profit = 40,000 - 26,000 - 8,000 = 6,000. Dividing by revenue gives 6,000/40,000 = 15.0%. The 35.0% figure is the gross margin minus nothing but misses cost of goods sold treatment: (40,000-26,000)/40,000 = 35.0%, which ignores operating expenses. 65.0% is COGS divided by revenue.
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