A product with a high gross profit could be an unprofitable product. True False

Question:

A product with a high gross profit could be an unprofitable product.

True

False

Traditional Income Statement:

Income statement can be presented using the traditional method or through the contribution margin approach. Considering that all product manufactured are sold, both methods will result in the same amount of net income. The only difference between the two is the existence of gross margin in traditional income statement while the contribution margin format presents the contribution margin.

Answer and Explanation:

FALSE

Using the traditional income statement, gross margin can be computed by deducting cost of goods sold or cost of services rendered to the total sales or revenues. The gross margin will serve as the limit of non-operating expenses such as selling and administrative expenses before the company incurs loss. A product with a high profit margin means that the cost of goods sold is lower as compared to other products which gives a more opportunity to generate more earnings. Assuming a normal business operation, product with high profit margin is deemed to be profitable for its will have higher gross margin to cover the non-operating expenses. The higher the gross profit, the higher amount will be retained as part of net income, considering the non-operating expenses does not increase much. Therefore, the statement of false because products with higher margin are deemed to be profitable.


Learn more about this topic:

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How to Calculate Gross Profit Margin: Definition & Formula

from Financial Accounting: Help and Review

Chapter 5 / Lesson 17
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