Multiple Choice
Which of the following is the correct formula for calculating net profit margin?
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4. Merchandising Operations
Net Sales
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Which one of the following will increase the profit margin of a firm?
A
Decreasing sales returns and allowances
B
Increasing operating expenses
C
Increasing cost of goods sold
D
Increasing sales discounts offered to customers
Verified step by step guidance1
Understand the concept of profit margin: Profit margin is calculated as (Net Income / Sales Revenue) × 100. It represents the percentage of sales revenue that turns into profit after all expenses are deducted.
Analyze the impact of sales returns and allowances: Sales returns and allowances reduce the net sales revenue. Decreasing these amounts will increase net sales revenue, which positively impacts the profit margin.
Evaluate the effect of operating expenses: Increasing operating expenses reduces net income, which negatively impacts the profit margin. Therefore, this option would decrease the profit margin.
Consider the impact of cost of goods sold (COGS): Increasing COGS reduces gross profit, which in turn reduces net income. A lower net income leads to a lower profit margin.
Assess the effect of sales discounts: Increasing sales discounts reduces net sales revenue, which negatively impacts the profit margin. Therefore, this option would also decrease the profit margin.
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