Question

Directions for questions 84 and 85: Study the aggregate financial ratios of all registered Indian manufacturing companies in the table below to answer the questions that follow.

All figures are as % of net sales unless otherwise mentioned
	2000	2001	2002	2003	2004	2005
PBDIT	13.1	11.7	12.3	13.3	14.4	14.7
PBDT	8.1	7.1	8	9.9	11.8	12.7
PBIT	9.4	8.4	8.7	9.9	11	11.6
PAT	3.2	2.8	2.7	4.4	6	6.9
Raw Material expense	41	40.6	43.1	45.5	45.7	47.1
Salaries and wages	5.9	5.7	5.6	5.3	4.9	4.4
Interest payments	4.6	4.3	4	3.1	2.3	1.7
Operating profit	5.2	4.2	4.9	6.7	8	8.7
Net sales (% Growth Over Previous Year)	18.4	19.3	2.6	15.7	15.2	19.9

In which year the annual growth rate in the aggregate Salaries and Wages expense was maximum?

• A. 2005
• B. 2004
• C. 2003
• D. 2001

Hint:

Salaries and Wages is a percentage of net sales, so its growth in any year depends on both the change in this ratio and the growth in net sales for that year. Combine the two for each year and compare.

Answer 1

The Correct Option is D

Look at the Salaries and wages row: it keeps falling every year, from 5.9% of net sales in 2000 down to 4.4% in 2005. If you only look at this row you might think the aggregate expense was falling too, but that ignores the fact that net sales itself was growing at a healthy rate each year.

To find the real growth of the rupee amount, index net sales to 100 in the base year and roll it forward using the "Net sales (% Growth Over Previous Year)" row, then multiply by the Salaries and Wages ratio for that year:

• 2001: net sales index rises 19.3%, ratio falls from 5.9 to 5.7 (a factor of 0.966). Combined change: $1.193 \times 0.966 - 1 = 15.3\%$.
• 2002: net sales index rises only 2.6%, ratio factor $5.6/5.7 = 0.983$. Combined change: $1.026 \times 0.983 - 1 = 0.8\%$.
• 2003: net sales index rises 15.7%, ratio factor $5.3/5.6=0.946$. Combined: $1.157 \times 0.946 - 1 = 9.5\%$.
• 2004: net sales index rises 15.2%, ratio factor $4.9/5.3=0.925$. Combined: $1.152 \times 0.925 - 1 = 6.5\%$.
• 2005: net sales index rises 19.9%, ratio factor $4.4/4.9=0.898$. Combined: $1.199 \times 0.898 - 1 = 7.7\%$.

The clear winner is 2001 at about 15.3%, well above every other year on this list. So even though the ratio fell the least that year compared to 2000, the strong 19.3% jump in net sales made 2001 the year with the fastest real growth in the aggregate wage bill.

Let's summarize:

• A falling percentage-of-sales ratio does not always mean a falling rupee figure; net sales growth can more than make up for it.
• 2001 combines a strong net sales jump with only a mild fall in the ratio, giving it the highest actual growth in Salaries and Wages.

So the answer is 2001.