Question

Higher the ratio, the lower the profitability is applicable to .

• A. Gross profit ratio
• B. Net profit ratio
• C. Operating ratio
• D. Return on investments

Answer 1

The correct option is C Operating ratio

Operating Ratio = [COGS + Operating Expenses] x $100$/ Sales

So, if COGS = $Rs.50000$, Operating Expenses = $Rs.20000$ and Sales = $Rs.100000$

then, Operating Ratio = [$50000+20000$] x $100$/ $100000$

= $70\%$

Here operating profit = $100000$ - [$100000$ x $70\%$] = $Rs.30000$

So, if the operating ratio increases to $80\%$ then

Operating profit = $100000$ - [$100000$ x $80\%$] = $Rs.20000$

Hence, it can be said that higher the operating ratio , lower the profitability.