Compared to Cinnamon’s operating margin in 2017, if it is deemed to have control of Cambridge, its operating margin in 2018 will most likely be:

A. lower.

B. higher.

C. the same.

Cinnamon, Inc. is a diversified manufacturing company headquartered in the United Kingdom. It complies with IFRS. In 2017, Cinnamon held a 19 percent passive equity ownership interest in Cambridge Processing. In December 2017, Cinnamon announced that it would be increasing its ownership interest to 50 percent effective 1 January 2018 through a cash purchase. Cinnamon and Cambridge have no intercompany transactions.
Peter Lubbock, an analyst following both Cinnamon and Cambridge, is curious how the increased stake will affect Cinnamon’s consolidated financial statements. He asks Cinnamon’s CFO how the company will account for the investment, and is told that the decision has not yet been made. Lubbock decides to use his existing forecasts for both companies’ financial statements to compare the outcomes of alternative accounting treatments.
Lubbock assembles abbreviated financial statement data for Cinnamon (Exhibit 1) and Cambridge (Exhibit 2) for this purpose.

EXHIBIT 1: Selected Financial Statement Information for Cinnamon, Inc. ( Millions) Year Ending 31 December Revenue Operating income 2017 2018* 1,400 1,575 126 142 Net income 31 December 62 69 2017 2018* Total assets 1,170 Shareholders' equity 616 1,317 685 * Estimates made prior to announcement of increased stake in Cambridge. EXHIBIT 2: Selected Financial Statement Information for Cambridge Processing ( Millions) Year Ending 31 December 2017 2018* Revenue 1,000 1,100 Operating income 80 88 Net income Dividends paid 40 44 20 22 31 December 2017 2018* Total assets 800 836 Shareholders' equity 440 462