Originally posted by kylie
A is WRONG cause the distance between the net profit and the gross profit represents expenses and the expenses remained constant throughout year one
Sorry to post this twice (i posted it in another thread) but yeah...
just to also point out that 12 is actually A
The reason why the net profit ratio AND the gross profit ratio increases, is because COGS reduces. Now this has absolutely NOTHING to do with sales as if sales were to increases, the cogs would still remain the same as a proportion of sales (i.e. the ratio would stay the same). Expenses can also be shown to remain the same as the gradients are equal (i.e. the net profit increases only at the same rate as the gross profit = no change in net profit)...
Now i think that there are issues with the answer being A in that people naturally think of expenses as being something to do with net profit, howevor this i only realy refering to operational expenses. The question just says "expenses" and I believe that it is a fair call to say that COGS is an expense in context to the question.
My main reason for choosing A is that it cant be C as the graph tells you nothing about sales performance so its impossible to deduce that it has had increased sales performance. Remember that it is the RATIO so any increase in sales has no effect on the gross profit ratio I.e. cogs will increase proportionally to sales. The onyl way you could claim that sales had increased is that the business improved its net profit due to a reduction in costs due to increased economies of scale, howevor this is irrelevant as the business had no increase in economies of scale as it can be shown that operational expenses (note that is not total expenses) remained constant (as it has an equal gradient to gross profit ratio)
If someone can challenge what im saying id love to hear it, cos i just dont see how someone can claim that sales increased based entirely on the graph..
Cheers..
