Gross margin decreases when sales prices drop relative to costs

Steps:

• Gross margin = (Sales revenue - Cost of goods sold) / Sales revenue × 100%.
• A decline from 25% to 15% means the ratio of profit to sales fell, likely due to changes in pricing or costs.
• Lower selling prices reduce sales revenue without proportionally cutting COGS, shrinking the margin.
• Options A, B, and D either lower costs or affect volume, which do not directly reduce the percentage.

Why C is correct:

• Reducing selling prices decreases the sales revenue denominator and numerator (if COGS unchanged), lowering the gross margin percentage per the formula.

Why the others are wrong:

• A: Paying less for purchases reduces COGS, increasing gross margin.
• B: Purchasing fewer goods affects inventory levels but not the sales-COGS ratio directly.
• D: Selling fewer goods impacts total sales volume but not the gross margin percentage.

Final answer: C