Depreciation Expense Proportion in Cost of Sales Question

[vgmalu]

Hello All,
Page no.74 FRA CFA L2 Curriculum June 2012.
It is writtern that
“A higher proportion of Depreciation Expense in Cost of Sales lowers the gross margin and lowers the operating expenses, but does not affect the operating margin”
I did not understand this,
If it lowers the operating expenses, how come it does not affect the operating margin?

 

[erobak]

The amount of depreciation which is in normal terms an operating expenses is split in 2 :
1/ One part in cost of sales (it’s related to inventories reevaluation?!) => lower gross profit and gross margin;
2/ The second part in the depreciation line in operating expenses.
Let’s take an example :
Case 1 : Case 2 :
Sales 5 000 Sales 5 000
COGS 1 000 COGS 1 500 (ow dep of investories)
Gross Profit 4000 Gross Profit 3 500
OpEx 2 000 OpEx 1 500
EBIT 2 000 => op. margin 40% EBIT 2 000 => op. margin 40%
the global amount of depreciation is the same, therefore the operating margin (Ebit/sales) is not affect by this accounting split.

 

[vgmalu]

ok no brainer, how can i miss this ??
Thanks a lot erobak !!

 

[erobak]

You’re welcome vgmalu ! Good luck !