BC Company has a gross profit percentage of 61% while AB Company has a gross profit percentage of 37%. Which of the following is true?

Multiple Choice

BC Company must be more efficient at controlling selling, general, and administrative expenses than AB Company.

BC Company will report a higher net income than AB Company

AB Company must have a greater sales volume than BC Company

None of the answers are acceptable.

Answer

AB Company must have a greater sales volume than BC Company

Explain

Gross profit has a direct relationship with volume of sales and closing inventory. The larger the volume of sales, the higher the expected groups profit margin. After selling a large volume, the closing inventory now determined gross profit margin. If what you have as closing inventory is very small it will have more than proportionate effect on gross profit margin.