Exam 4: Financial Statement Analysis and Forecasting

Correct Answer:

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Gross profit margin = (Sales - Cost of goods sold)/ Sales
Operating margin = Net operating income / Sales
I would expect the gross profit margin to be greater than the operating margin as,usually,the net operating income is less than Sales - Cost of goods sold due to other fixed costs such as advertising and R&D.These costs are not included in the Cost of Goods Sold because,in the short run,they are not related to sales.
It is possible that Baggins' used EBITDA rather than NOI in his calculation.EBITDA would include investment income (i.e.,income from trade credit)and therefore could be greater than Sales - COGS.