Margins Reveal Cost and Expense Shifts

Steps:

• Calculate Year 1 cost of sales: $100,000 × (1 - 0.45) =$55,000.
• Calculate Year 1 expenses: Gross profit ($45,000) - net profit ($5,000) = $40,000.
• Calculate Year 2 cost of sales: $100,000 × (1 - 0.40) =$60,000 (increased from $55,000).
• Calculate Year 2 expenses: Gross profit ($40,000) - net profit ($3,000) = $37,000 (decreased from$40,000).

Why C is correct:

• Gross margin drop shows cost of sales rose as a percentage of revenue; profit margin drop was smaller, so expenses fell relative to revenue (profit margin = net income / revenue).

Why the others are wrong:

• A: Cost of sales increased, not decreased (gross margin fell).
• B: Expenses decreased, not increased (total costs rose less than gross costs).
• D: Expenses decreased, not increased (same error as B).

Final answer: C