A retail company's gross profit margin has fallen from 40% last year to 32% this year, despite sales volume remaining constant. Which of the following is the most likely cause of this decrease?

Answer options:

An increase in administrative expenses.

The company offered significant trade discounts to customers to maintain sales volume.

A decrease in the cost of raw materials from suppliers.

An increase in the corporate tax rate.

How to approach this question

Identify factors that affect Gross Profit (Revenue and Cost of Sales). Exclude factors that affect operating expenses or tax.

Full Answer

B.The company offered significant trade discounts to customers to maintain sales volume.✓ Correct

Gross profit margin is (Gross Profit / Revenue). It is affected only by changes in selling prices or cost of sales. Offering trade discounts reduces the effective selling price (Revenue), which lowers the gross profit margin. Administrative expenses and tax do not affect gross profit.

Common mistakes

Selecting an option that affects net profit but not gross profit (like admin expenses).

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Practice the full ACCA FA — Financial Accounting Practice Exam 3

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