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The table below shows two profitability ratios calculated for A B C Ltd and XYZ Itd for the period ended 31 Dec 2022: multicolumn(1)(|c|)( Ratio ) & A B C Ltd & X Y Z Ltd Gross profit margin & 40 % & 15 % Operating profit margin & 10 % & 10 % Which of the following statements is an incorrect interpretation of the two ratios: The two companies generated the same amounts of operating profits in 2022. ABC Ltd has a higher gross profit margin compared to XYZ Ltd. The ratios suggest that A B C Ltd could be better at managing their cost of sales, compared to XYZ Itd.

Question

The table below shows two profitability ratios calculated for A B C Ltd and XYZ Itd for the period ended 31 Dec 2022:

 multicolumn(1)(|c|)( Ratio ) & 
 A B C 
Ltd
 & 
 X Y Z 
Ltd
 
 
Gross 
profit 
margin
 & 40 % & 15 % 
 
Operating 
profit 
margin
 & 10 % & 10 % 


Which of the following statements is an incorrect interpretation of the two ratios:
The two companies generated the same amounts of operating profits in 2022.
ABC Ltd has a higher gross profit margin compared to XYZ Ltd.
The ratios suggest that A B C Ltd could be better at managing their cost of sales, compared to XYZ Itd.

The table below shows two profitability ratios calculated for A B C Ltd and XYZ Itd for the period ended 31 Dec 2022: multicolumn(1)(|c|)( Ratio ) & A B C Ltd & X Y Z Ltd Gross profit margin & 40 % & 15 % Operating profit margin & 10 % & 10 % Which of the following statements is an incorrect interpretation of the two ratios: The two companies generated the same amounts of operating profits in 2022. ABC Ltd has a higher gross profit margin compared to XYZ Ltd. The ratios suggest that A B C Ltd could be better at managing their cost of sales, compared to XYZ Itd.

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ZaneMaster · Tutor for 5 years

Answer

The incorrect statement is: "The two companies generated the same amounts of operating profits in 2022." This statement is incorrect as from the operating profit margin shown in the table, we can only infer that both companies have the same ratio of operating profit to sales visitors, but it doesn't mean the absolute amounts of their operating profits are the same - as this also depends on absolute sales visitors which is not provided.

Explain

## Step 1: <br />We look at the information given in the table : Gross profit margin and Operating profit margin for both companies ABC Ltd and XYZ Ltd. <br /><br />## Step 2: <br />Gross profit margin is the percentage of sales that exceed the cost of goods sold. It signifies how well a company is able to manage its costs of goods sold(A higher ratio shows better management). While the operating profit margin measures the percentage of a company's revenue left after paying variable costs of production. <br /><br />## Step 3: <br />Considering the fact that both companies have the same operating profit margin but have different gross profit margin, we can interpret following things: <br /><br />###-\(ABC Ltd \) has a higher gross profit margin ( \(40 \% \)) than \(XYZ Ltd \) (\(15 \%\)), implying the \(ABC \) is better at managing their cost of goods sold. <br />###-\(ABC Ltd \) and \(XYZ Ltd \) both have the same operating profit margin (\(10 \% \)), indicating that both have the same ratio of operating profit to sales revenue.<br />###-We infer from the lower gross profit margin that \(XYZ Ltd \) may have features of a price competitive company, meaning the company prioritizes high volume of sales over high profit margin on individual units sold.<br /><br />## Step 4: <br />Now we match our inferences against given statements to find out the wrong statement.
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