In Year 3, Newman Manufacturing’s gross profit margin remained unchanged from Year 2. But in Year 3, the company’s net profit margin declined from the level reached in Year 2. This could have happened because, in Year 3,

Answer (A) is correct. Gross profit margin is net sales minus cost of goods sold. Net profit margin is gross profit margin minus all remaining expenses and losses, one of which is income taxes. If corporate tax rates increased, net profit margin would decrease, leaving gross profit margin unchanged.