Drill 17 ·
AP Business with Personal Finance: Income Statement (Drill 17) is a practice drill. It contains 5 original questions created by Brian Stewart, a Barron's test prep author with over 20 years of tutoring experience.
Practice interpreting a two-year comparative income statement: calculating a margin, diagnosing why profitability declined, defining gross profit, and recommending an action that targets the line that moved. This drill uses an invented company and original figures.
Trailmark Bicycles assembles and sells bicycles. The comparative income statement below shows two years of results, in thousands of dollars.
| Item | 2024 | 2025 |
|---|---|---|
| Revenue | 800 | 880 |
| Cost of Goods Sold | (480) | (572) |
| Gross Profit | 320 | 308 |
| Operating Expenses | (200) | (200) |
| Operating Profit | 120 | 108 |
| Interest and Taxes | (40) | (36) |
| Net Profit | 80 | 72 |
Question 1. What was Trailmark's gross profit margin in 2025?
Explanation: The answer is 35%. Gross profit margin is gross profit divided by revenue: 308 / 880 = 0.35. The 40% figure is the 2024 margin, not 2025. The 65% figure is the share of revenue taken by cost of goods sold in 2025. The 12% choice is not supported by the statement.
Question 2. Revenue rose from 2024 to 2025, yet net profit fell. Which change most directly caused the decline in profitability?
Explanation: The answer is that cost of goods sold rose faster than revenue. Revenue increased about 10 percent while cost of goods sold increased about 19 percent, so gross profit and every profit line below it fell. Operating expenses were unchanged at 200. Interest and taxes actually fell from 40 to 36. Revenue rose rather than fell.
Question 3. On this statement, "gross profit" is best described as which of the following?
Explanation: The answer is revenue minus the cost of goods sold. That is the definition of gross profit. Revenue minus all expenses describes net profit. Operating profit minus interest and taxes also yields net profit, not gross profit. Net profit plus operating expenses happens to be a number but is not what gross profit means.
Question 4. Trailmark's owner wants to reverse the decline in gross margin shown in the 2025 statement. Based on the data, which action would most directly address the line causing that decline?
Explanation: The answer is to renegotiate supplier contracts to lower the direct costs of parts and assembly. Gross margin fell because cost of goods sold rose about 19 percent while revenue rose only about 10 percent, compressing the gross margin, so the fix has to target those direct production costs. Raising the marketing budget chases more revenue at the same squeezed margin and could push costs higher still. Interest and taxes already declined and sit below the gross-profit line, so they are not the cause. Operating expenses stayed flat at 200 and are not what narrowed the gross margin.
Question 5. An investor wants to know whether Trailmark kept the same share of each sales dollar as profit across the two years. Comparing which pair of figures answers that best?
Explanation: The answer is net profit margin in 2024 versus 2025. Net profit margin measures the profit kept from each sales dollar: 10 percent in 2024 against about 8 percent in 2025. Comparing revenue alone measures size, not share. Comparing single cost lines does not give profit per dollar of sales.