Question

Would an inventory write-down increase, decrease, or have no effect on DDS’s gross profit margin (2 points)? Why

Answer 1

Ans: Gross profits equal net sales minus cost of goods sold. If the business in sells its products at a profit, in other words the profit margin is positive, faster sales mean more gross profits while slower sales result in a decline in gross profits. Therefore, if the written down or buildup in inventories is the result of a change in the sales pace, and the firm has a positive profit margin, written down inventories will mean higher gross profits, while higher inventories will result in lower gross profits.The more you write down inventories by selling them, the lower your gross profits margin will be.

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