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ACCA Strategic Professional · Strategic Business Reporting (International) · Analysis and interpretation of financial and non-financial information and measurement of performance

Zeta Co reports revenue of $800m, gross profit of $240m and profit from operations of $96m. Management proposes to reclassify $24m of depreciation of delivery vehicles from administrative expenses to cost of sales, with no change to total profit. Which statement about the effect on ratios is correct?

Gross margin falls from 30% to 27% while operating margin stays at 12%. Reclassifying expenses into cost of sales lowers gross profit by $24m, but total operating profit is unaffected because only the classification within the statement changes.

  1. AGross margin falls from 30% to 27% and operating margin is unchanged at 12%Correct
  2. BGross margin and operating margin both fall by 3 percentage points
  3. CGross margin is unchanged at 30% and operating margin falls to 9%
  4. DGross margin rises to 33% and operating margin rises to 15%

Explanation

Moving $24m into cost of sales reduces gross profit to $216m, giving 216/800 = 27% against the original 30%. Profit from operations remains $96m, so the margin stays at 12%. The option stating both margins fall wrongly assumes the reclassification changes total profit.

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