As part of Alex’s analytical procedures work on the financial statements of Big Staffie Ltd, he has identified that the gross profit margin has fallen from 27% to 24%.
Which ONE of the following could be a valid explanation for this decrease?
Select ONE answer:
- Unusually high sales at the end of the year resulted in lower levels of closing inventory as compared to the previous year
- Increased competition resulted in sales prices being cut
- A bank overdraft resulted in a higher interest expense than in previous years
- There was no significant change in the mix of products sold
Show your workings to arrive at your answer, and explain and justify your reasons:
……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………
This multiple-choice question is suitable for Accounting KS5 classes.
The answer is 2
- Not correct
- Correct == > If sales prices are cut but costs remain the same gross profit margins will fall. If the company sells a greater proportion of goods with a lower margin than in previous years the overall margin will be reduced. Increased levels of sales (and therefore lower closing inventory) will not affect gross profit margins provided selling prices are maintained. Interest expense is not deducted in arriving at gross profit, therefore it can have no effect on gross profit margins.
- Not correct
- Not correct
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