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ACCA Applied Knowledge · Financial Accounting · Analysis of financial statements

Vega Co's gross profit margin fell from 32% to 28% while its operating profit margin stayed at 10%. Which is the most likely explanation consistent with these figures?

Operating expenses fell as a percentage of revenue. The expense ratio equals gross margin less operating margin: it was 22% and became 18%. Operating margin stayed at 10% only because lower relative expenses offset the fall in gross margin.

  1. AOperating expenses fell as a percentage of revenueCorrect
  2. BOperating expenses rose as a percentage of revenue
  3. CRevenue fell while cost of sales was unchanged
  4. DDepreciation on non-current assets was increased

Explanation

Operating margin = gross margin minus expenses as a percentage of revenue. Expenses ratio was 22% (32-10) and became 18% (28-10), so expenses fell as a percentage of revenue. A rise in expenses ratio would have reduced operating margin.

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