Question 3.A.6: Calculate the gross profit margin for Alexis plc for the yea...
Calculate the gross profit margin for Alexis plc for the year to 31 March 2016.
The ratio for 2016 is:
Gross profit margin = \frac{409}{2,681} × 100 = 15.3 \%
The decline in this ratio means that gross profit was lower relative to sales revenue in 2016 than it had been in 2015. Bearing in mind that
Gross profit = Sales revenue – Cost of sales (or cost of goods sold)
this means that cost of sales was higher relative to sales revenue in 2016 than in 2015. This may indicate that sales prices were lower and/or that the purchase cost of carpets sold had increased. It is possible that both sales prices and purchase costs had reduced, but the former at a greater rate than the latter. Similarly, they may both have increased, but with sales prices having increased at a lesser rate than the cost of the carpets.
Clearly, part of the decline in the operating profit margin ratio is linked to the dramatic decline in the gross profit margin ratio. While after paying for the carpets sold, for each £1 of sales revenue 22.1p was left to cover other operating expenses in 2015, this was only 15.3p in 2016.
The profitability ratios for the business over the two years can be set out as follows:
| 2015 | 2016 | |
| % | % | |
| ROSF | 33.0 | 2.0 |
| ROCE | 34.7 | 5.9 |
| Operating profit margin | 10.8 | 1.8 |
| Gross profit margin | 22.1 | 15.3 |