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CS Executive · Corporate Accounting and Financial Management · Financial Statement Analysis

In the common-size income statement of Meera Foods Ltd, cost of materials consumed was 55% of revenue in Year 1 and 60% of revenue in Year 2. Other expenses were unchanged as a percentage. What is the most appropriate inference?

Materials cost per rupee of sales rose from 55 paise to 60 paise, putting pressure on margins. With other expense ratios unchanged, profit margin falls by five percentage points. Common-size percentages do not reveal absolute amounts, so nothing can be concluded about revenue or absolute cost movements.

  1. AProfit margin before other items has improved by 5 percentage points
  2. BMaterials cost per rupee of sales rose, putting pressure on marginsCorrect
  3. CAbsolute materials cost must have fallen
  4. DRevenue must have declined

Explanation

Materials rose from 55 paise to 60 paise per rupee of sales, so with other expenses constant the margin falls by 5 percentage points. Percentages alone do not tell us absolute amounts, so claims about absolute cost or revenue falling cannot be drawn.

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