Question

Assertion (A) : A high operating ratio indicates a favourable position.
Reasoning (R) : A high operating ratio leaves a high margin to meet non operating expenses.
1. (A) and (R) both are correct and (R) correctly explains (A).
2. Both (A) and (R) are correct but (R) does not explain (A).
3. Both (A) and (R) are incorrect.
4. (A) is correct but (R) is incorrect.

Answer 1

Correct Answer - Option 3 : Both (A) and (R) are incorrect.

Assertion (A): A high operating ratio indicates a favorable position.

Explanation: 

1. In finance, the Operating ratio is a company's operating expenses as a percentage of revenue.
2. This financial ratio is most commonly used for industries that require a large percentage of revenues to maintain operations, such as railroads. In railroading, an operating ratio of 80 or lower is considered desirable. 
3. Operating Ratio refers to a metric used by a company to determine how efficient a company’s management is at keeping operating costs low while at the same time generating revenues or sales, by comparing the total operating expenses of a company to that of its net sales. 
4. A higher ratio would indicate that expenses are more than the company’s ability to generate sufficient revenue and may be considered inefficient.
5. Similarly, a relatively low ratio would be considered a good sign as the company’s expenses are less than that of its revenue.

​Thus, the assertion is incorrect.

Reasoning (R): A high operating ratio leaves a high margin to meet non-operating expenses.

Explanation:

1. Operating Ratio = (Operating Expenses / Net Sales) * 100.
2. The operating ratio is used to measure the operational efficiency of the management.
3. It shows whether or not the cost component in the sales figure is within the normal range.
4. A low operating ratio means a high net profit ratio (i.e., more operating profit) and vice versa. 
5. A high operating ratio leaves less margin to meet non-operating expenses.

Thus, the reason is incorrect.

Both Assertion And Reason Are Incorrect.