Which of the following will cause an increase in net profit margin, asset turnover and financial leverage as long as expenses do not grow faster than revenue?
A) An increase in profit
B) A decrease in average total assets
C) An increase in sales volume
D) A decrease in total liabilities

Question

Quizplus · Accepted Answer

An increase in sales volume will result in higher revenue, which will increase net profit margin (profit/revenue). If expenses remain constant or grow slower than revenue, this will also result in higher net profit. An increase in sales volume will also increase asset turnover (revenue/average total assets) as more assets are being utilized to generate revenue. Finally, financial leverage (assets/equity) will increase with an increase in total assets unless equity also increases proportionally. A and D are not necessarily true as an increase in profit or a decrease in total liabilities may not result in an increase in net profit margin, asset turnover, or financial leverage. B will decrease asset turnover, which is not desirable.

Which of the Following Will Cause an Increase in Net