XYZ’s operating margin is 15%, 14%, 12%, 8% for years 1,2,3,4 respectively. Where would you look...

XYZ’s operating margin is 15%, 14%, 12%, 8% for years 1,2,3,4 respectively. Where would you look to see if this is being cause by external factors or by internal factors? Be specific.

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Expert Solution

The operating margin is declining and the income statement is the best place to analyze whether this is due to internal factors. The income statement depicts the operating income and operating expenses of the business. The operating margin can be calculated by dividing the operating income by the net revenue. There can be two reasons for a declining operating margin. Either the sales are declining or the operating expenses are increasing. Further analysis can be conducted by studying the individual expense components and whether the expenses are increasing or declining. The cash flow statement can also be analyzed to understand if expenses are increasing. In case the sales are declining the reason for the same has to be analyzed with the help of the sales team. The reason for declining sales may be due to changing trends which is an external factor or may be due to lack of efficiency of the sales department. The same needs to be checked.

jeff jeffy answered 10 months ago

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