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Answers to supplementary objective test questions

CHAPTER 19 – ANALYSIS OF FINANCIAL PERFORMANCE AND
POSITION

19.1 B, D

Increased spending on sales and marketing could increase operating costs and
could explain a reduction in operating profit margins.

A reduction in gross margins could reduce operating margins if the company
was unable to reduce its operating costs/overheads compared to the previous
period.

A decrease in sales would not necessarily result in a worsening of profit
margins. The ratio is given as a percentage of sales. It is affected by changes in
sales prices or expense movements. A change in sales volumes theoretically
would cause the same proportionate change to costs and expenses. Therefore,
should not impact the operating profit margin.

NB. Changes in sales volumes could impact operating profit margin only if the
customer has negotiated cheaper sales prices as a result of the change in sales
volumes. e.g. through economies of scale. However, this is a sales price
change rather than simply a change in volume. If no indication of a change in
price caused by the economies of scale is present in the question, then volumes
cannot be considered as having an impact on margins.

A decrease in irrecoverable debt expenses would improve operating profits.
Consequently this would improve rather than reduce operating margins.

19.2 B, C

A is not a realistic explanation as the current ratio reflects working capital
figures and return on capital employed reflects long-term finance.

D is not a realistic explanation as return on capital employed reflects the return
on total capital, regardless of whether it is in the form of equity or debt.

E is not a realistic explanation as a revaluation policy would have a negative
impact on ROCE as it would increase capital employed. C’s ROCE would be
expected to be lower than D’s, not higher.

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