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

Step 1: Understanding the Question.
The row "Salaries and wages" is a percentage of net sales, so we cannot judge its growth just by looking at whether the percentage rose or fell. It actually fell every year from 5.9 in 2000 to 4.4 in 2005. But the aggregate rupee amount of salaries and wages can still grow if net sales grow fast enough to offset the falling ratio. We must combine the ratio change with the given net sales growth for each year.

Step 2: Key Formula.
For any year \(t\), if \(r_t\) is the Salaries and Wages ratio and \(g_t\) is the net sales growth (over the previous year) given in the table, then the growth in aggregate Salaries and Wages in year \(t\) is:
\[ \text{Growth}_t = (1+g_t)\left(\frac{r_t}{r_{t-1}}\right) - 1 \]
We can only compute this for 2001 to 2005, since we do not have the 2000 ratio of the previous year (1999).

Step 3: Compute year by year.
2001: \(g=19.3\%\), ratio change \(=5.7/5.9=0.9661\). \[ (1.193)(0.9661) - 1 = 0.1526 = 15.26\% \]
2002: \(g=2.6\%\), ratio change \(=5.6/5.7=0.9825\). \[ (1.026)(0.9825) - 1 = 0.0081 = 0.81\% \]
2003: \(g=15.7\%\), ratio change \(=5.3/5.6=0.9464\). \[ (1.157)(0.9464) - 1 = 0.0951 = 9.51\% \]
2004: \(g=15.2\%\), ratio change \(=4.9/5.3=0.9245\). \[ (1.152)(0.9245) - 1 = 0.0650 = 6.50\% \]
2005: \(g=19.9\%\), ratio change \(=4.4/4.9=0.8980\). \[ (1.199)(0.8980) - 1 = 0.0767 = 7.67\% \]

Step 4: Compare and eliminate.
Among 2001 to 2005, the highest growth is in 2001, at about 15.3 per cent, clearly ahead of 2005 (7.7%), 2004 (6.5%), 2003 (9.5%) and 2002 (0.8%). So 2005, 2004, 2003 and 2002 are all wrong; the year with maximum growth is 2001, which was originally option 5 and now becomes option 4 after the fold.

Final Answer:
The annual growth in aggregate Salaries and Wages expense was maximum in the year 2001.
\[ \boxed{2001} \]