Practice prompt · Q:statement-presentation-comprehensive-income-and-disclosure/practice-revenue-growth

Explain a falling gross margin

Choose evidence that can explain a gross margin decline.

Updated Sep 13, 2026 Review due Dec 13, 2026

Practice

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A company’s revenue rises from $800 thousand to $1,000 thousand while gross margin falls from 40% to 38%. Management attributes the decline to higher material prices. Which evidence would best test that explanation?

Choose the best answer. a Compare interest expense and income tax payments across the two periods. b Compare material purchase prices and quantities, selling prices, and product mix across the two periods. c Treat the revenue increase as proof that material prices rose. d Compare only total operating expenses because they determine gross margin.

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Answer: b

Compare direct material prices and quantities, selling prices, and product mix before attributing the gross-margin decline to materials.