 ## DragIT - Profitability ratios

In the image below, try clicking on the arrows beside each variable to see the impact of changes on the profitability ratios. Once you have done that, you may like to have a go at the questions below. 1

##### Profitability ratios

An increase in expenses will lead to a fall in gross profit.

 a) True b) False Yes, that's correct. Well done. The statement is false. An increase in expenses will lead to a fall in net profit, but the gross profit does not take account of expenses.No, that's not right. The statement is false. An increase in expenses will lead to a fall in net profit, but the gross profit does not take account of expenses.Your answer has been saved. 2

##### Profitability ratios

A decrease in the cost of goods sold will lead to an increase in net profit.

 a) True b) False Yes, that's correct. Well done. The statement is true. A decrease in the cost of goods sold will lead to an increase in gross profit and net profit and so the net profit margin will increase (assuming the same level of turnover).No, that's not right. The statement is true. A decrease in the cost of goods sold will lead to an increase in gross profit and net profit and so the net profit margin will increase (assuming the same level of turnover).Your answer has been saved. 3

##### Profitability ratios

Choose appropriate options below to make up a suitable description of profitability ratios.

Profitability ratios are a measure of the profitability of the firm. There are three main ratios. The first is the Return on Capital Employed. This is calculated by dividing the by the level of . To increase the ratio the firm will need to increase . The next ratio is the gross profit margin. This is calculated by dividing the by the level of and multiplying by 100 to get it as a percentage. The final ratio is the net profit margin and this is calculated by dividing the figure by the level of turnover and multiplying by 100 to get it as a percentage. If increase, this will reduce the , but will not affect the . However, if the increases this will affect both the gross and net profit margins.

Yes, that's correct. Well done.No, that's not quite right. Have another go.Your answer has been saved. 4

##### Net profit margin

Which of the following will increase the net profit margin?

 a) A fall in turnover b) Bulk buying of raw materials lowers the unit cost c) An increase in efficiency d) A decrease in the cost of goods sold e) An increase in expenses a) Yes, that's correct. A fall in turnover will reduce the level of gross and net profit and so is unlikely to increase the margins.a) No, that's not right. A fall in turnover will reduce the level of gross and net profit and so is unlikely to increase the margins.b) Yes, that's correct. Lower unit costs will help increase both the gross and net profit margins (assuming the same level of turnover).b) No, that's not right. Lower unit costs will help increase both the gross and net profit margins (assuming the same level of turnover).c) Yes, that's correct. A greater level of efficiency will lower unit costs will help increase both the gross and net profit margins (assuming the same level of turnover).c) No, that's not right. A greater level of efficiency will lower unit costs will help increase both the gross and net profit margins (assuming the same level of turnover).d) Yes, that's correct. A decrease in the cost of goods sold will increase the gross profit, and will therefore also increase the net profit. d) No, that's not right. A decrease in the cost of goods sold will increase the gross profit, and will therefore also increase the net profit.e) Yes, that's correct. An increase in expenses will reduce the net profit margin.e) No, that's not right. An increase in expenses will reduce the net profit margin. 