If,year on year,sales revenue increased by 10%,gross margin decreased from 40% to 35% of sales revenue and profit before tax increased by 6%,by how much did the Selling General and Administrative Expenses (which were 10% of sales revenue in the first year)increase or decrease from one year to the next (assume no interest expense accrued during the period).

Question

Quizplus · Accepted Answer

If sales revenue increased by 10%, the revenue in the second year would be 110% of the revenue in the first year. Let's assume that the revenue in the first year was $100.
- In the first year, gross margin was 40% of sales revenue, so gross profit was $40.
- In the second year, gross margin decreased to 35%, so gross profit would be 35% of $110 = $38.50
- Profit before tax increased by 6%, which means it was $40.50 (i.e., $40 x 1.06) in the second year.
- If SG&A expenses were 10% of sales revenue in the first year, they would be $10.
- To calculate the SG&A expenses in the second year, we subtract the gross profit and profit before tax from the total revenue: $110 - $38.50 - $40.50 = $31.
- Therefore, SG&A expenses in the second year were $31, which is a decrease of $10 (or 33%) from the first year. 
So, the correct answer is C, SG&A expenses declined by 33%.

If,year on Year,sales Revenue Increased by 10%,gross Margin Decreased from 40