Question

Q1:An analysis of the 2018 and 2019 profitability of Coronation Ltd showed that its gross profit margin increased, but operating profit margin decreased. Which of the following situations could explain the changes in the profitability ratios?

a. lower b. higher c. unable to be calculated d.unaffected by the transaction

Q2:

Which of the following independent statements are the possible explanations for higher current operating profit margin ratio than in the previous year?

i) Using expensive material in the production of product X

ii) Hiring a local, instead of internationally acclaimed, marketing agent

iii) Relocating the factory in a country with cheaper manpower

iv) Lowering selling price of product X

Answer 1

1) Solution: lower

Explanation: Gross Profit = [Net Sales - Cost Of Goods Sold]

Operating Profit = [Gross Profit - Operating Expenses]

When operating expenses decreases it indicates an increase in operating expenses thus lowering the profitability ratios

2) Solution: Relocating the factory in a country with cheaper manpower

Explanation: Operating margin computes the company profit on a dollar of sales after the payment of variable production costs, such as raw materials and wages. The cheaper manpower reduces the variable cost and results to higher current operating profit margin ratio