Final answer:
Net profit margin (NPM) is a financial ratio that measures a company's profitability. It is calculated by dividing net profit by total revenue and multiplying by 100 to get a percentage.
The NPM can increase or decrease based on factors that affect the company's overall profitability, such as advertising expenses and sales increases.
Step-by-step explanation:
Net profit margin (NPM) is a financial ratio that measures the profitability of a company by comparing its net profit to its total revenue.
It is calculated by dividing net profit by total revenue and multiplying the result by 100 to get a percentage. For example, if a company has a net profit of $10,000 and total revenue of $100,000, the NPM would be 10% ($10,000/$100,000 x 100 = 10%).
In the given example, a 10% NPM means that the company's net profit is 10% of its total revenue.
If the company spent $4,000 on advertising and experienced a $3,000 increase in sales, the NPM could potentially increase or decrease depending on how these costs and sales affect the overall profitability of the company.
If the $4,000 advertising expense leads to a significant increase in sales and ultimately increases the net profit by an amount greater than $4,000, then the NPM may increase.
On the other hand, if the $4,000 advertising expense does not result in a substantial increase in sales or if the additional sales do not generate enough profit to offset the expense, the NPM may decrease.