Question

Because of his business's recent success, Sam has decided to expand his Sam's Swimming Pool Cleaning to include another branch. This will add expenses for another office and payroll for five more employees, but Sam's customer base will stay the same, at least for a while. Until Sam's new branch starts bringing in new customers, how will this change affect Sam's gross profit margin?
a.
An added expense of a new branch has nothing to do with Sam's gross profit margin.
b.
Since the new branch is adding expenses, Sam's gross profit margin will go down.
c.
Since the new branch is adding expenses, Sam's gross profit margin will go up.
d.
Since the expense the new branch is adding is negligible, Sam should see no change in his gross profit margin.

Answer 1

a.

Gross profit margin is based on revenue minus cost of goods sold. Office/overhead and most payroll are operating (period) expenses, which affect operating/net profit margin, not gross profit margin. (Only if the added payroll were treated as COGS—direct costs of delivering the service—would gross margin fall.)