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 net profit margin?
a.
An added expense of a new branch has nothing to do with Sam's net profit margin.
b.
Since the new branch is adding expenses, Sam's net profit margin will go down.
c.
Since the new branch is adding expenses, Sam's net profit margin will go up.
d.
Since the expense the new branch is adding is negligible, Sam should see no change in his net profit margin.

Answer 1

b. Since the new branch is adding expenses, Sam's net profit margin will go down.

Explanation: Net profit margin = net profit ÷ revenue. With higher expenses and the same revenue, net profit falls, so the margin decreases.