Builtrite\'s upper management has been comparing their books to industry standar

Question

Builtrite's upper management has been comparing their books to industry standards and came up with the following question: Why is our gross profit margin higher than the industry standard and our operating profit margin lower than the industry standard?

A Builtrite has lower than average operating expenses

B Builtrite has higher than average operating expenses

C Builtrite has lower than average interest expense

D Builtrite has higher than average interest expense

A Builtrite has lower than average operating expenses

B Builtrite has higher than average operating expenses

C Builtrite has lower than average interest expense

D Builtrite has higher than average interest expense

Explanation / Answer

The Reason is : B) Builtrite has higher than average operating expenses

Subtracting cost of goods sold from net sales will give you gross profit. The reason of high gross profit could be company is able to sell its products at a higher price or it is able to keep its cost of goods sold at a lower level than industry standards.

A higher-than-industry-average gross profit margin increases your chances of generating a net profit provided that you are able to keep your expenses within industry average levels.

Operating profit is the pre-tax profit or in other words it is calculated by subtracting operating expenses from the gross profit. Operating profit margin is equal to operating income divided by the total revenue. A lower operating margin despite of having higher gross profit is because the company is not able to control its operating expenses or in other words they are incurring higher operating expenses as compare to industry.

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