Question

Assertion (A): If Operating Ratio is 75%, sale of goods for ₹ 40,000 will not change the ratio.

Reason (R): Since Operating Ratio of the Company is 75%, increase in Revenue from Operations by ₹ 40,000 will result in decrease in Closing Inventory by 75% of ₹ 40,000. Hence, Cost of Revenue from Operations will increase by ₹ 30,000 and Revenue from Operations will increase by ₹ 40,000. Thus Operating Ratio will remain unchanged.

In the context of the above two statements, which of the following is correct?

Options

• (A) and (R) both are correct and (R) correctly explains (A).

• Both (A) and (R) are correct but (R) does not explain (A).

• Both (A) and (R) are incorrect.

• (A) is correct but (R) is incorrect.

Answer 1

(A) and (R) both are correct and (R) correctly explains (A).

Explanation:

If the Operating Ratio is 75%, it means that the cost of revenue from operations equals 75% of sales. Additional sales of ₹ 40,000 will result in a cost increase of 75%, or ₹ 30,000, and a drop in closing inventory. Because both revenue and costs increase proportionally, the Operating Ratio remains constant. As a result, both assertion and reasoning are correct, and reasoning accurately explains the assertion.