Profit margin rose while ROCE fell due to capital growth outpacing profit gains

Steps:

• Profit margin (net profit/sales) increased from 15% to 20%, indicating higher profitability relative to sales, likely from rising gross profit.
• ROCE (profit/capital employed) decreased from 9% to 6%, showing lower returns despite profit gains, implying capital employed grew faster than profit.
• Capital introduction boosts capital employed denominator, diluting ROCE.
• Gross profit rise supports the profit margin improvement without contradicting ROCE decline.

Why C is correct:

• ROCE formula (profit/capital employed) decreases when capital introduced increases the denominator more than profit rises; gross profit increase drives the higher profit margin (net profit/sales).

Why the others are wrong:

• A: Drawings reduce capital employed, raising ROCE, opposite of the observed decline.
• B: Net profit decrease would lower profit margin, not raise it from 15% to 20%.
• D: Repaying long-term loan reduces capital employed, increasing ROCE, not decreasing it.

Final answer: C