If gross profit percentage decreases, which could be a cause?

• A. Increase in cost of sales.
• B. Increase in selling price.
• C. Stock gains.
• D. Improved stock turnover.

Answer: (A)

The main idea is that gross profit percentage shows how much profit remains from sales after covering the cost of the goods sold. It drops when the cost of sales rises relative to sales. If the cost of goods sold goes up—say prices paid for inventory increase or more expensive inputs are used—without a corresponding rise in selling prices, gross profit shrinks and the margin falls. If selling prices go up while costs stay the same, the margin would typically rise, not fall. Stock gains, which come from valuing closing stock higher, tend to reduce cost of sales and can raise the margin, not lower it. Improved stock turnover mainly affects efficiency and working capital rather than the margin itself. So the factor that could cause a decrease in gross profit percentage is an increase in cost of sales.