Assertion (A): Inspite of a higher operating ratio the profitability tends to be lower. Reason (R): Operating ratio shows a relationship between net operating profit and net sales. Now, select the correct answer:

The correct answer is: B. Both (A) and (R) are true, but (R) is not correct explanation of (A).

Operating ratio is a measure of a company’s profitability. It is calculated by dividing a company’s operating expenses by its net sales. A higher operating ratio indicates that a company is spending more money on its operations, which could lead to lower profitability.

However, there are other factors that can affect a company’s profitability, such as its cost of goods sold, its selling, general, and administrative expenses, and its interest expense. Therefore, it is not always true that a higher operating ratio will lead to lower profitability.

In some cases, a company may choose to increase its operating expenses in order to improve its long-term profitability. For example, a company may invest in research and development in order to develop new products or services. This investment may lead to higher operating expenses in the short-term, but it could also lead to higher profits in the long-term.

Therefore, while both (A) and (R) are true, (R) is not a correct explanation of (A). A higher operating ratio does not always lead to lower profitability.