Question

How can a company have a decreasing gross profit margin but an increasing operating profit margin?

Answer 1

A decreasing gross profit margin may be due to decreasing prices or increasing cost of goods sold.

To overcome the impact of decreasing gross profit margin, a firm may tighten its operating expenditure budget and reduce the operating expenses. The operating expenses may be reduced to such an extent as to more than offset the impact of the decreasing gross profit margin and to produce increasing operating profit margins. Hence, the situation described is a possibility.