Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 153

An organization had a gross profit margin of 40 percent in year one and in year two. The net profit margin was 18 percent in year one and 13 percent in year two.

Which of the following could be the reason for the decline in the net profit margin for year two?

Answer options

• A. Cost of sales increased relative to sales.
• B. Total sales increased relative to expenses.
• C. The organization had a higher dividend payout rate in year two.
• D. The government increased the corporate tax rate.

Correct answer: D

Explanation

The correct answer is D because an increase in the corporate tax rate would directly reduce the net profit margin by increasing the tax expense. Options A, B, and C do not necessarily explain a decline in net profit margin, as they could potentially lead to either improved margins or have no direct impact on net profitability.