Operating profit

This topic has 3 replies, 2 voices, and was last updated 10 years ago by John Moffat.

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December 30, 2015 at 12:57 pm #293033
hamzaukadia
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I have a question where in Year 1
Sales: 209,320
Cost of sales: (109,298)
operating expenses:(67,546)
PBIT – 32,476
Year 2
Sales: 222,896
Cost of sales: (117,825)
operating expenses:(71,358)
PBIT – 33,713
Year 3
Sales: 237,595
Cost of sales: ((129,591)
operating expenses:(73,058)
PBIT -34,946
The operating margin is decreasing in each year from:
Yr 1 – 15.5
Yr 2- 15.1
Yr 3 – 14.7
I’m struggling as to why the OPM is decreasing since all sales, cos, op expenses and PBIT are increasing.
December 30, 2015 at 5:50 pm #293052
John Moffat
Keymaster
- Topics: 57
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The profit margin is the profit as a % of the sales.
So in the first year it is 32476 / 209320 = 15.5%
If you check for the second and third years, you will find that the % profit is decreasing as per the answers you have written.
December 30, 2015 at 5:59 pm #293058
hamzaukadia
Participant
- Topics: 13
- Replies: 13
Thanks John,
But is the reason for operating profit margin declining because gross profit is also decreasing?
December 31, 2015 at 9:10 am #293078
John Moffat
Keymaster
- Topics: 57
- Replies: 54845
In this particular case yes – the cost of sales is increasing more than the revenue, and therefore the gross profit % is falling.
However, although not in this question, it could also have been because the operating expenses were increasing more than the revenue.
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