- This topic has 9 replies, 2 voices, and was last updated 8 years ago by
.
- Posts
Question) Which of the following current year events would explain a fall in a company’s operating profit margin compare to the previous year ?
A) A reduction in the allowance for uncollectible receivables
B) A change from the amortisation of development costs being included in cost of sales to being included in administrative expenses.
For B: It has no link to revenue. It only concerns operating profit(PBIT). Both cost of sales(COS) and administrative expenses are above PBIT. Therefore, whether it’s included in COS or admin expenses, will still give the same PBIT. Therefore, no effect on operating profit margin. Am i right ?
For transaction A , i dont understand how it will affect the operating profit margin. Could you explain sir ?
Yes, you are correct.
It would be good to have ALL the available options because neither of those that you have given me is an appropriate answer to the question!
Okay sir.
The other options are
C) An increase in gearing leading to higher interest costsD) A decision to value inventory on the average cost basis from the first in first out (FIFO) basis. Unit prices of inventory had risen during the current year.
The answer is D . Im just trying to evaluate each option to ensure that i understand why is not the answer.
That is why i just want to know how Option A will affect the company’s operating profit margin because i see no link between allowance for uncollectible receivables and operating profit margin. Could you explain sir ?
I’m sure that I’ve asked you before – please give me the full question!
There doesn’t have to be any connection with revenue for operating profit to change.
Even if it were gross profit that you were asked about, there still does not need to be any connection with revenue. The matter under discussion could be instead something that affects cost of sales and not revenue directly
In fact, that’s what option D does so I fail to understand your apparent belief that underpins this comment in your original post “For B: It has no link to revenue”
You comment, again in your original post “For transaction A , i dont understand how it will affect the operating profit margin. Could you explain sir ?”
Well, of course it will affect operating profit. Any movement in the allowance for receivables (provision for doubtful debts) will have an affect on operating profit because the movement in that allowance account will be double entered to the statement of profit or loss
However, in option A, that movement is a reduction in the allowances account and is therefore debited to allowances and credited to profit or loss.
Thus the effect is to INCREASE operating profits and that’s why option A is not the correct answer choice
You’re welcome but I’ve just deleted your most recent post in error, sorry
Please re-post
Okay this was my recent post sir.
Question) Which one of the following is not a reason for a decrease in gross profit margin ?
A. A major customer renewed their contract during the year following a competitive tender process
B. New plant and equipment used in the manufacturing process has been purchased in the year, which has increased the depreciation expense.
C. Delivery costs to customers have risen following an increase in the rates charged by couriers.
D. A national recession had led to sales prices being cut in response.
Hi sir, how does option A affect the gross profit margin ? Could you explain sir ? Will it only increase revenue since its a competitive tender process ?
“… how does option A affect the gross profit margin ? Could you explain sir ? Will it only increase revenue since its a competitive tender process ?”
A customer has had us over a barrel and said (effectively) “If you don’t drop your prices, we’ll take our business to one of your competitors” … so we drop our prices. It’s what happens in competitive tendering! It’s a buyers’ market
And a competitive tendering process, if we win, is likely to increase revenue but decrease gross margins
- The topic ‘Operating profit margin’ is closed to new replies.