Sales volume does not affect gross profit margin, when all costs of sales are...

topcat
topcat Trusted RegularRegistered Posts: 452
"Sales volume does not affect gross profit margin, when all costs of sales are variable" (stolen from Green light explanation)

Another question for you lucky lucky people if anyone know it please

Why does sales volume not affect gross profit margin?

Is it because the amount of variable materials are being used in proportion to the sales?

More sales = more materials = higher cost of sales
but
lower sales = less materials used = lower costs of sales

so everything is in proportion?

I think this is why just trying to get my ahead around the wording

Thank you in advanced
Just for reference whole question (look away now if you haven't done the financial performance green light yet)












Gross profit margin for product Exe was 45% in 20X2 but fell to 41% in 20X3. All costs of sales are variable costs. Which of the following could explain the decrease in gross profit margin?


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The cost of sales increased in the year.


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The sales volume increased in the year.


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The cost of sales decreased in the year.


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The sales price increased in the year.


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The sales volume decreased in the year.


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The sales price decreased in the year.


[h=3]Explanation of the correct answer[/h] Gross profit margin = gross profit/revenue. Gross profit = revenue less cost of sales. Sales volume does not affect gross profit margin, when all costs of sales are variable, but will affect absolute (£) gross profit. If sales price decreases, or cost of sales increases, the gross profit per unit will decrease.

Comments

  • Nps
    Nps Experienced Mentor Registered Posts: 782
    Yes, that's exactly right. For example, if you can sell something at £10 and variable costs are £5, your gross profit is £5 (margin - 50%). No matter what multiple of £10 sales you have, the £5 costs will be multiplied by the same multiple, and you will always get the same 50% profit margin.
  • topcat
    topcat Trusted Regular Registered Posts: 452
    Nps wrote: »
    Yes, that's exactly right. For example, if you can sell something at £10 and variable costs are £5, your gross profit is £5 (margin - 50%). No matter what multiple of £10 sales you have, the £5 costs will be multiplied by the same multiple, and you will always get the same 50% profit margin.

    brilliant thank you Nps!:001_smile: its always nice to have confirmation to make sure your not going completely mad as a hatter
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