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Hi sir, for spetember 2016 exam question 32) part (b), in the answer key, there is one statement, in the first paragraph saying
” The group/company have relatively low operating expenses (at around 4% of revenue ), so the poor gross profit margin feeds through to the operating profit margin. ”
I understand the part where they said that Gregory Co(single entitty) and Gregory group have low operating expenses because they are only 4% of revenue.
But what does it mean by the poor gross profit margin feeds through to the operating margin. I don’t understand sir.
Does it mean that because the group/company have low operating expenses that’s why the poor gross profit margin is very close to the operating profit margin ?
It certainly is an interesting way of putting it!
But I would agree with you … the poor gross profit margin results directly in a poor operating profit margin
It would be a fascinating picture if a poor gross profit margin didn’t lead on to a poor operating profit margin! So the suggestion that the poor operating profit margin is as a result of ‘relatively low operating expenses at around 4% of revenue’ doesn’t seem to be logical.
Had it been the other way round – the acceptable gross profit margin has been adversely affected by the relatively high operating expenses resulting in a poor operating profit margin – now that would have made great sense
But the resultant ‘poor operating profit margin’ in Gregory’s case is not a result of low operating expenses – it’s a result of a poor gross profit performance
OK?
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