Selected financial ratios from Mulroy Company’s common-size income statements are as follows:
20X1
20X2
20X3
Gross profit margin
22%
24%
26%
Operating profit margin
18%
20%
22%
Pretax margin
15%
14%
13%
Net profit margin
11%
10%
9%
Relative to sales, it is most likely that Mulroy’s: A. operating expenses are increasing. B. income tax expense is increasing. C. nonoperating expenses are increasing.
Nonoperating expenses are equal to the difference between operating profit and pretax profit. Based on the given profit margins, Mulroy’s nonoperating expenses increased from 3% of sales in 20X1 to 9% of sales in 20X3. Because gross profit margin is increasing, cost of goods sold is decreasing as a percentage of sales. Other operating expenses and income tax expense, as a percentage of sales, were stable over the period shown.
