DFS ratios - is this an appropriate answer?

swirlywirly

In the Dec 07 exam (I think anyway), section 2, the net profit % has increased by around 2% and it's obvious that it's because of the admin expenses being cut down. The distribution expenses increased by the same % as revenue.

For MY answer I have put that the net profit doesn't need to be improved as the company have already made efforts to keep admin expenses down, and should continue what they are doing. I didn't think the distribution expenses going up by the same % as revenue was a bad thing really, so didn't feel the need to mention it.

In the REAL answers however, they have put "the net profit could be improved by further reducing either the distribution costs or admin expenses, or both. Given the expenses ratio perhaps attention should be given to trying to reduce the distribution expenses"

Is my answer ok? Is it wrong to say it can't be improved in this type of situation?

Probably won't get a question like this on the exam now! But it's useful to know in case.

Thanks!

Rinske

I'm not doing DFS so not sure if this really helps, but if distribution went up with the same % as the revenue, I'd say that's quite understandable if it's a variable cost, however if it's a fixed cost, this might be something to monitor.

After a quick look at the question, they ask how to improve it, so my guess would be that the official answer given is the easiest way to improve it, but I'm not sure if your answer would be correct in that case.

Sorry, not much help here!

swirlywirly

Thanks Rinske, I think you are probably right. If the question asks how to improve something, then the answer should be how to improve something! Quite simple really now I think about it.

Good point about fixed/variable costs, didn't even think of that.

JayneHogan

I did not think about fixed or variable costs either but as costing is not examined in DFS it is sufficent just to give one or two sentences describing how the ratio could be improved. In order to get marks in this question you have to give one way that each of the ratios could be improved. Don't throw an easy mark away by saying "Well I think the company would take all factors into consideration and leave the distribution costs as they are." There are always going to be a number of factors involved when you are looking at the accounts and how to improve the financial position of the company. In THIS case what the examiner wants to see is that you can understand that, from a theory perspective, the way to improve an operating profit ratio is to cut expenses i.e. distribution costs or administration costs. That would win you the marks for the question. If the company decides to take practical issues into consideration and says "O.K. we are not going to cut distribution costs as we need the money from advertising revenue (one distribution cost) or we need to deliver our product to customers and therefore make more profit" then that is entirely another consideration which is not covered in the scope of this question.

marveljoe

I was told by my helpful tutor that I should explain what the ratio is showing for example net profit ratio deals with the operating costs then explain what impact the ratio has by incresing by 2% mention how to keep the costs down such as distribution costs and admin expenses i.e tyring to reduce money spent on advertising.