Q. Would the answer still be “Yes” even if sales increased and the COGS stayed about the same?
A. Poll Question 1 is as follows:
“The change in the gross margin indicates that Total Coverage, Inc. managed production costs better in 2018 than in 2017.
- Agree.
- Disagree.”
The gross margin increased from 53.98% in 2017 to 56.75% in 2018, which means that the company managed its production costs better in 2018 than in 2017. As the gross margin increases, the cost of goods sold as a percentage of sales decreases. The company produced its products cheaper in 2018 than in 2017. That is, it managed its production costs better in 2018 than it did in 2017.
If COGS relative to sales is about the same, then the company is managing the production costs at the same level as in the previous period. Improved management of the COGS would be reflected by a lower COGS relative to sales and, therefore, a higher Gross Margin since one is the flip side of the other.
If the company produces products more efficiently, its Gross Margin will be greater since it uses up less costs per dollar of sales in producing its products. All increases, decreases, or flat results for the Gross Margin are based on the performance ratios and not on the changes in the dollar amounts.
Course overview: Critical Ratios and The First Necessary Condition for Business Success