Question

Builtrite's upper management has been comparing their books to industry standards and came up with the following question: Why is our gross profit margin lower than the industry standard and our operating profit margin higher than the industry standard?

		Builtrite has lower than average operating expenses
		Builtrite has higher than average operating expenses
		Builtrite has lower than average interest expense
		Builtrite has higher than average interest expense

Answer 1

The reason is Option First (Builtrite has lower than average operating expenses).

Gross Profit Margin is calculated by subtracting Cost of Goods Sold from Net Sales. ie. Net Sales - Cost of Goods Sold

The reason for a lower gross profit margin than the industry standard can be either higher Cost of Goods sold or Lower Net Sales or both. Operating Profit Margin is calculated by subtracting the operating expenses(administrative costs, Salaries and Depreciation etc.) from Gross Profit Margin. The reason for the higher Operating Profit Margin can be lower than average operating expenses than the industry standard. It can be due to lower administrative costs or salaries or depreciation or any other components of Operating Costs. All these shall contribute to higher Operating Profit Margin as compared to industry standards.