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Kim Smith.
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Noah098
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Revenue has grown by 28% in the year however, cost of sales has only increased by 10%.
This increase in sales may be due to the bonus scheme and the advertising however, this does not explain the increase in gross margin.
There is a risk that sales may be overstated.
P.S.- GPM has increased from 44.4% to 52.2% y-o-y.
Ma’am i don’t understand in what context are they talking about GPM? what exactly doesn’t explain the increase in GPM?
Kim Smith
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It’s the same issue I addressed on your previous post https://opentuition.com/topic/gross-profit-margin-4
If margins are assumed to be constant – increased sales volume does not change GP% because cost of sales should also be increased for that volume. So if GP% increases without a valid explanation (e.g. sales prices were increased during the year but without a corresponding increase in costs of sales) – either revenue is overstated and/or cost of sales is understated (e.g. purchases are understated)
Noah098
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ohhh so you are saying that the fact that COS didn’t increase by 28% (i.e. as much as revenue) means that sales volumes have not increased(due to factors such as advertising or bonus), but instead overall revenue has increased due to other manipulative tactics-which further gets corroborated through abnormal rise in GPM.
am i getting it correctly?
Kim Smith
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Yes!
Noah098
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