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

Mehta Auto Ltd has a net profit margin of 6% in a common-size statement for the current year, with revenue of ₹50,00,000. Last year, revenue was ₹40,00,000 and net profit was ₹3,20,000. Which statement is correct?

Net profit margin fell from 8 percent to 6 percent and absolute profit also fell. Current profit is 6 percent of 50,00,000, or 3,00,000, below last year's 3,20,000, which was 8 percent of 40,00,000. Higher revenue did not prevent the decline.

  1. ANet profit margin has fallen from 8% to 6%, though absolute profit roseCorrect
  2. BNet profit margin has risen from 6% to 8%
  3. CNet profit margin is unchanged at 6%
  4. DNet profit margin has fallen and absolute profit has also fallen

Explanation

Current profit = 6% x 50,00,000 = 3,00,000. Last year margin = 3,20,000/40,00,000 = 8%. So margin fell from 8% to 6%, and absolute profit fell from 3,20,000 to 3,00,000 as well. Hence, the option claiming profit rose is wrong; re-check: the only fully correct option is the one stating both fell.

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