A company's gross profit margin fell from 32% to 27% over the year while revenue was unchanged and operating expenses stayed the same in amount. What is the most likely effect on the net profit margin?
Answer and explanation
Correct answer: C. The net profit margin falls by the same five percentage points
- Step 1: Gross profit fell by 5% of revenue.
- Step 2: Operating expenses and revenue are unchanged, so net profit falls by the same amount.
- Step 3: The net profit margin therefore falls by 5 percentage points.
Answer
The net profit margin falls by the same five percentage points.
Why not the others: Gross profit fell while expenses were unchanged, so profit must be lower. Expenses are unchanged, but gross profit has fallen, so net profit has fallen too. With revenue and expenses unchanged, net profit falls by exactly the fall in gross profit.
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