CFA® Level I question of the day
21 October 2026 · Financial Statement Analysis
A company moves production in house and its gross margin jumps. Is it more profitable?
Show the answer and explanation
Answer: B. Not necessarily, since costs may have moved
Costs may have shifted from cost of sales into overheads, which operating margin would reveal. Margins are shares of revenue, and a cost that changes which line it sits on changes the shares without changing the total. Reading the three together is what catches it.
- A. Yes, because gross margin measures profitability - It measures one slice of it. Costs that shifted out of cost of sales into overheads would raise the gross margin while leaving total profit unchanged.
- C. No, because in-house production always costs more - Sometimes it costs less - that is often the reason for the move. The point is that the gross margin alone cannot tell you either way.
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