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Hello sir. Could you please explain the consequences of these options. Thanks.
Which of the following will Reduce a company’s gross profit ratio,when sales are increasing?
1) A change in the product sales mix resulting in fewer sales of the more profitable products.
2) Increasing costs of purchases not passed on to customers.
3) An increase in the amount of inventory held.Whether sales (in units) are increasing or decreasing will obviously have no effect on the gross profit margin (we call it gross profit margin, not gross profit ratio).
1. If they change the mix and sell fewer of the more profitable products (and therefore more of the less profitable products) then the GP margin will fall.
2. If purchases increase then profit falls (if the increase is not passed on to customers). Therefore the GP margin will fall.
3. Increasing the inventory has no effect on the GP margin.
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