After declining in 20Y2, all of Revolutionary Designs profit margins recovered to some extent in 20Y3. How sustainable are 20Y3s margins and why?

A. Although the companys operating profit margin improved by only a fraction of the growth in gross margin, the steady decline of taxation and other expenses as a percentage of sales suggests the company should be able to sustain its 20Y3 margins.

B. Despite a substantial increase in 20Y3 gross margin, none of the other margins was able to keep pace. Until the company can better control these costs, it is questionable whether it can sustain even 20Y3s margins.

C. Revolutionary Designs narrow gross profit margin makes sustaining its operating, pre-tax, and net profit margins very challenging.

D. The substantial improvement in Revolutionary Designs gross margin should enable it to comfortably sustain its 20Y3 profit margins.

Revolutionary Designs Ltd Statements of Financial Position (Common Size) (in $000s) As At December 31: 2013 2012 20Y1 % ASSETS Current assets Cash and equivalents Accounts receivable $ $ 230 $ 310 1,194 9.5 36.6 7.8 28.8 221 794 8.6 31.1 846 Raw materials Work in process Finished goods Total Inventory 501 452 146 1,099 15.4 13.9 4.5 33.7 611 409 156 1,176 20.8 13.9 5.3 40.0 440 275 156 871 17.2 10.8 6.1 34.1 Other current assets Total current assets 36 2,639 1.1 80.9 41 2,293 1.4 78.1 23 1,909 0.9 74.7 699 Gross fixed assets Less: Accumulated depreciation Net fixed assets 117 582 21.4 3.6 17.8 723 99 624 24.6 3.4 21.2 701 89 612 27.4 3.5 24.0 Patents and trademarks 40 1.2 20 0.7 34 1.3 TOTAL ASSETS $ 3,261 100.0 $ 2.937 100.0 $ 2,555 100.0 $ $ 0.6 $ LIABILITIES AND EQUITY Current liabilities Current portion-LTD Notes payable Note payable Jack Newsome-subordinated Accounts payable Accrued expenses Other current liabilities Total current liabilities 19 810 200 1,053 288 11 2,381 0.6 24.8 6.1 32.3 8.8 0.3 73.0 19 775 200 834 207 25 2,060 26.4 6.8 28.4 7.0 0.9 19 745 200 551 155 12 1,682 0.7 29.2 7.8 21.6 6.1 0.5 65.8 70.1 Long-term debt Other noncurrent liabilities Total liabilities 162 3 2,546 5.0 0.1 169 3 2.232 5.8 0.1 175 3 1,860 6.8 0.1 715 21.9 705 24.0 695 27.2 Shareholders' equity TOTAL LIABILITIES AND EQUITY $ 3,261 100.0 $ 2.937 100.0 $ 2,555 100.0 Revolutionary Designs Ltd Statements of Comprehensive Income (in $000s) Years Ended December 31: 2013 2012 20Y1 $ $ $ 8.010 6,328 1,682 7,506 6,377 1,129 6,515 5,473 1,042 Sales Cost of goods sold Gross profit Selling, general and administrative expenses Depreciation expense Interest expense Loss on disposition of fixed assets Other expense Net income before taxes Taxation Net income 1,315 26 84 27 22 208 858 24 78 o 4 165 706 18 54 0 0 264 100 79 130 108 86 $ 134 5/8