O Level Accounting (7707)•7707/12/O/N/22
Explanation
Gross Profit and Margin Analysis
Steps:
- Calculate Year 1 sales: 133,333.
- Calculate Year 2 sales: 214,286.
- Observe sales revenue increased by about 61%, gross profit by 88%, and margin by 5 points.
- Determine higher sales volume with reduced COGS explains rising profit and margin.
Why D is correct:
- Gross margin = (Sales - COGS) / Sales; increased quantity raises sales revenue, while decreased expenses (COGS) improves the margin ratio.
Why the others are wrong:
- A: Price increase with quantity decrease would likely reduce total sales revenue, contradicting the calculated increase.
- B: Sales expenses affect operating profit, not gross profit or margin.
- C: Quantity increase with price decrease typically lowers margin if COGS remains proportional.
Final answer: D
Topic: Interpretation of accounting ratios
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