CMA Study Group

Hello everyone,

I am having a hard time understand how can a company increase it operating profit margin while its gross profit margin decreases by lowering the selling price to increase quantities sold.

Can somebody explain the question below to me please?

According to its public financial statements, a company's gross profit margin decreased by 5% while
its operating profit margin increased by 3%. Which one of the following factors could cause both of
these changes?

a. An increase in the cost per unit of the goods purchased from a supplier.
b. A change to the variable costing income statement format.
c. A lowered selling price to increase quantities sold.
d. Sale of fully-depreciated production machinery at a gain and replacement of the machines with
newer models.

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Diogo Pimenta

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Hi Diogo,

I believe you understand a lowered selling price leads to a company's gross profit margin decreased by 5%. You just don't understand why its operating profit margin increased by 3%. Increased quantities sold can increase the gross profit in dollars. Administrative expenses( or SG&A) usually are fixed regardless of how many quantities sold. Hence increased gross profit subtracts fixed SG&A=increased operating profit. The operating profit margin could go up.   ​

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Regards,
Christine Ye
Manager
China
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Original Message:
Sent: 09-05-2020 11:01 AM
From: Diogo Pimenta
Subject: CMA Pt. 2 Q78 | Gross Margin and Operating Margin

Hello everyone,

I am having a hard time understand how can a company increase it operating profit margin while its gross profit margin decreases by lowering the selling price to increase quantities sold.

Can somebody explain the question below to me please?

According to its public financial statements, a company's gross profit margin decreased by 5% while
its operating profit margin increased by 3%. Which one of the following factors could cause both of
these changes?

a. An increase in the cost per unit of the goods purchased from a supplier.
b. A change to the variable costing income statement format.
c. A lowered selling price to increase quantities sold.
d. Sale of fully-depreciated production machinery at a gain and replacement of the machines with
newer models.

------------------------------
Diogo Pimenta

------------------------------

@Yuyan Ye thanks for getting back to me. I understand it conceptually. However, I haven't been able to translate this into the formulas.

Gross Margin formula is [(P - VC)*Q] / [P*Q] which simplified gets to 1 - (VC/P).

Operational Margin on the other hand is GM - SG&A which might be written as 1 - (CV/P) - (SG&A/P*Q).

Therefore, even if gross profit in dollars increase I don't see how the OM would increase, based on the formulas above.

What am I missing?

​

------------------------------
Diogo Pimenta
Analyst
Barreiro
Portugal
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Original Message:
Sent: 09-07-2020 02:31 AM
From: Yuyan Ye
Subject: CMA Pt. 2 Q78 | Gross Margin and Operating Margin

Hi Diogo,

I believe you understand a lowered selling price leads to a company's gross profit margin decreased by 5%. You just don't understand why its operating profit margin increased by 3%. Increased quantities sold can increase the gross profit in dollars. Administrative expenses( or SG&A) usually are fixed regardless of how many quantities sold. Hence increased gross profit subtracts fixed SG&A=increased operating profit. The operating profit margin could go up.   ​

------------------------------
Regards,
Christine Ye
Manager
China

Original Message:
Sent: 09-05-2020 11:01 AM
From: Diogo Pimenta
Subject: CMA Pt. 2 Q78 | Gross Margin and Operating Margin

Hello everyone,

I am having a hard time understand how can a company increase it operating profit margin while its gross profit margin decreases by lowering the selling price to increase quantities sold.

Can somebody explain the question below to me please?

According to its public financial statements, a company's gross profit margin decreased by 5% while
its operating profit margin increased by 3%. Which one of the following factors could cause both of
these changes?

a. An increase in the cost per unit of the goods purchased from a supplier.
b. A change to the variable costing income statement format.
c. A lowered selling price to increase quantities sold.
d. Sale of fully-depreciated production machinery at a gain and replacement of the machines with
newer models.

------------------------------
Diogo Pimenta

------------------------------