Question: Auto Parts Heaven is a U.S. company whose operations include a large, 100% owned foreign subsidiary. The subsidiary's functional currency is the U.S. dollar. The local currency in the country where the foreign subsidiary operates is appreciating against the U.S. dollar. The subsidiary accounts for inventories using the FIFO method.
Required: Compare each of the following ratios for the foreign subsidiary in its functional currency after translation to the same ratios in the local currency before translation. Briefly explain why each ratio differs.
1. Gross profit margin percentage.
2. Operating profit margin.
3. Net profit margin.