# Mark-up and Margins

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1. says

Good Morning John – Can you kindly give me some insight into test question 3. cheers

• says

If the revenue has been understated by 10,000, then both revenue and profit will increase by 10,000.

If inventory has been overstated by 5,000, then cost of sales will be understated and therefore gross profit will be overstated. Revenue will not be affected.

2. says

Good Evening sir. Kindly explain the mechanism (workings) that allows us to determine that some goods costing \$2,500 have been stolen in queation 6. Thank you in advance.

• says

Could it be that the items stolen, having a value of \$2,500 (and potential sales value of \$5,000) represent the amount ”Stolen” ( lost in the process of doing business ) from the sales ? It all sounds glitchy here but I am still confused.

• says

The sales are 95,000. Because sales are two time the cost, it means the cost of the good sold must have been 47,500.

At the moment, the cost of sales is 40,000 + 60,000 – 50,000 = 50,000.
So it must mean that the goods stolen had cost 50,000 – 47,500 = 2,500

• says

I definitely thought so as I laid out a trading income. Thank you once again.

• says

The sales are 193,200, so the cost of sales were 100/142 x 193,200 = 136056.

Since inventory fell by 13,200, the purchases must have been 136056 – 13200 = 122856

• says

Thanks alot….. i actually got tht answer but its not one of the choices so i thought i did something wrong….

• says

Think you guys made a mistake……

• says

No, I think you made a mistake!

If you read the question it asks for the answer to the nearest \$1,000 (which is \$123,000)

• says

opppss i missed tht, tht always happen with me, especially in a hurry.

3. says

Hi John,

Can you please explain question 5 for me.

I inventory 380000, add purchases 480000, minus destroyed inventory 220000 = 640000
Margin % on sale 30% = 650000 / 1.3 = 500000 – 640000 = 140000 Answer B, but he answer is A.

I thinking i’m working out the / 1.3 wrong. Can you also explain how to work the algebraic formula for working this margin out.

Thanks

AJ

• says

If there is a margin of 30%, it means that the profit is 30% of selling price.

So…..here, the profit is 30% x 650,000 = 195,000
The cost of sales is 70% x 650,000 = 455,000

The cost of sales = 380,000 + 480,000 – closing inventory.
So the closing inventory should be 405,000.
However the actual closing inventory is 220,000 and so the remainder must have been destroyed in the fire: 405000 – 220000 = 185,000.

Hope that is clear

• says

Thank you. Was getting confused in working the percentage out but very clearly explained. The 30% is profit so 70% is COS, will hopefully make is easier working the other answer out.

4. says

C is correct.

If sales were 281250, then cost of sales is 1/1.5 x 281250 = 187500.

Goods available for sale were 432800, so closing inventory should have been 432800 – 187500 = 245300.
Actual closing inventory was 204600, so lost inventory = 245300 – 204600 = 40700.

5. says

Question: A sole trader fixes her prices by adding 50% to the cost of all goods purchased. On 31 October 20X3 a fire destroyed a considerable part of the inventory and all inventory records. Her trading a/c for the year ended 31 October included the following. \$ \$ Sales: 281, 250. Opening inventory at cost: 183,600. Purchases: 249,200. Goods available for sales. 432,800. Closing inventory. (204,600) COGS. 228,200 Gross profit 53,050. What inventory loss has occurred? A. \$61,050 B. \$87,575 C. \$40,700 D. \$110,850 (my calculations gave me A but the answer according to the revision kit is C)

• says

6. says

Hi John,

I know this has been abundantly asked before, and i do understand the concept of question 3, the part i don’t understand is why the sales would increase by 10,000 if revenue increases by the same amount? Ignoring the other discovery (CI overstated by \$5000), if we assume the business operates on a fixed gross profit margin (which is the case no?), wouldn’t the gross profit increase by only the gross profit percentage of the revenue?

Cheers

7. says

Kindly help with this question

Payables: opening balance = \$4,000; closing balance = \$5,000. Payments made = \$20,000
Receivables: opening balance = \$7,000; closing balance = \$9,000. All sales are on credit.
Inventory: opening balance = \$5,500; closing balance = \$2,000.
Gross profit percentage = 25%
How much cash has been collected for from customers?

A- \$30,000
B- \$32,000
C- \$28,000
D- \$26,000

• says

I do not know where you found this question, but either you have typed some of the question wrongly, or the question is wrong because none of the four answers are correct!
(I am guessing that the opening inventory should be \$5,000 and not \$5,500).

However, using the figures as you have typed them:

From the payable information, you can calculate the total purchases for the year. Best way is to do a t’account for payables – you know the opening and closing balances, you know the cash paid, and so the missing figure will be the purchases. (It comes to \$21,000)

Now you know the purchases, you can calculate the cost of goods sold. This is always equal to opening inventory + purchases – closing inventory. (In this example it comes to \$24,500).

Now you know the cost of goods sold, and you know the gross profit %, you can calculate the sales figure. It will be 100/75 x cost of goods sold (which in this example comes to \$32,667)

Now that you know what the sales are, and you know the opening and closing balances on receivables, you can calculate the cash received from customers. (In this example it comes to \$30,667)

(If the opening inventory is actually \$5,000 and not \$5,500, then the approach remains the same, but you will end up with the cash received as \$30,000. which is answer A)

• says

Thanks, the question is from Fa 2 notes which I have downloaded from open tution, I am confused that if it says gross profit percentage, does it means mark-up or margin ?

• says

I will check the notes when I get home tonight – maybe there is an error.

Gross profit % means gross margin (i.e % of selling price)

• says

Kindly help with this question

Opening payables balance = \$4,000
Closing payables balance = \$6,000
Payments to credit suppliers = \$12,000
Cash purchases = \$1,000
What is the total purchases figure?

A- 7,000
B- 10,000
C- 11,000
D- 6,000

• says

Hi again!

I have checked the questions and answers in the FA2 notes, and there are mistakes (it is clear what the mistakes are when you look at the workings in the answers at the back).

In the case of the first problem, the closing inventory in the question should be 2500 (not 2000) and then the correct answer would be 32,000.

In the case of the second problem, the correct answer is 15,000 (credit purchases of 14,000 + cash purchases of 1000).

I do apologise. I will speak to the person who wrote the notes, and have the errors corrected immediately.

Thank you for spotting them

8. says

Hello John,
Quick question on test number 1. If sales is 612 at 25% markup that would mean we would then find 100% of this and get 489600. Our closing inventory added on and then subtracting opening sales and inventory gives us 26400 missing…how is it that the answer it says we should get is 57000?

I have been racking my brain for a while on this one.

Cheers,
Neil

• says

But the question says that there is a gross profit % of 25% – not that there is a markup of 25%.

So the cost of sales should be 612000 – (25% x 612000) = 459000.

• says

Sorry…lol…?This morning I looked at it with fresh eyes. Thanks for the response.

9. says

Dear sir, i have a little problem with example 2
Peter has sales of dollar 120,000. his gross profit is 20%.

Sales 120,000
Profit 20% of 120,000 is 24,000
so cost of sales is 96,000.

But i have a little problem with 20% of 96,000 is 19,200 profit and the total will be 115,200 (why ?)

but if it is done like this: 100/120 x 120,000 = 100,000 cost of sales
20% of 100,000 = 20,000 and therefor 100,000+ 20,000 = 120,000
Is it right the way i have done it?

• says

A margin (or gross Profit %) is always a % of sales.

A mark-up is always a % of cost.

So…if sales are 120,000 and there is a gross profit (or margin) of 20%, then the profit is 20% x 120,000 = 24,000.

10. says

please can the 2&3 from the test be explained?

For question 2 I had the inventory total of \$836200
add : purchase of goods \$8600
less sales of goods \$14,000
less goods returned \$700
the revised inventory total of \$830,100
which I have obviously calculated incorrectly as it is not one of the options but after looking at the answers I am unable to see how you would arrive at the figure of \$838,100.

For question 3
I increased the revenue total by \$10000 to \$90,000
I decreased the gross profit by \$5000 to \$15,000
I calculated the percentage as 16.67 which is option B but after looking at the answers I am unable to understand how the answer is 27.8%.

• says

For question 2, you have made a couple of mistakes.
Firstly, you should be working backwards. The inventory of 836200 is on 4 June – you need to work backwards to find out what it was on 31 May.
So….since they made purchases after 31 May of 8,600, it means that the inventory on 31 May was 8,600 less than it was on 4 June. Similarly you need to add the sales that were made after 31 May and add goods that were returned to the supplier.
Also, inventory is valued at cost, so when you are adding back the sales they need adding back at cost. \$14000 is the selling price and so the cost was 70% x 14,000 = 9800.
The inventory at 31 May was therefore 836200 – 8600 + 9800 + 700 = \$838,100

For question 3, what you have done is correct, except that you have forgotten that if the revenue is 10,000 higher then the profit will also be 10,000 higher. This means that the revised profit will be \$25,000 and therefore the profit percentage will be 25000/90000 = 27.8%

• says

Thank you for the prompt response and the explanation. It makes sense now

• says

You are welcome
I am pleased that you are OK with it now.

11. says

a sole trader fixes her prices by adding 50 per cent to the cost of all goods purchased. on the 31 october 20×3 a fire destroyed a considerable part of the inventory and all inventory records. her trading account for the year ended 31 october 20×3 included the following figures:
sales 281250
opening inventory at cost 183600
purchases 249200
less:closing inventory at cost 204600
228200
gross profit 53050

using this information, what inventory loss has occurred?

Can someone hep me with the workings of this question.

• says

Since the sales are made at a markup (profit on cost) of 193200, the cost of sales is 193200/1.42.

When you have the cost of sales you can adjust by the change in inventories to get the purchases.

• says

This is the problem where I got stuck. Please explain how to adjust inventories when we don’t know purchases?

• says

But you know the cost of what you sell. If you also increase your inventories you will need to purchase more, if you reduce your inventories then you need to purchase less.

• says

I’m not understanding the qestion please explain me in detail.

• says

No I do not understand you.
You said in your last reply that the part you got stuck on was how to adjust for the inventory, but now you say you do not understand the question!

Here is an example:

If you sell goods with a cost of sales of \$1000, and there is no change in inventories, then you need to need to pay \$1000 to buy them (the purchases).

However if you also want to increase your inventories, then you need to purchase more than \$1000 – if you want to increase your inventories by (say) \$100, then you would need to make purchases of \$1100.

Similarly, if you reduce your inventories, then you are using some of your inventory to sell, and the purchases will therefore be the cost of sales less the reduction in inventory.

12. says

I can not watch video lectures.It says that no server found. can anyone help me?(((((((((((((

• says

I guess you should either refresh the page and try again thru yr browser(I use Chrome) or you might have to upgrade yr Adobe Flash player.

• says

ok. thks so much. let try

13. says

Hello everybody
I have trouble in understanding mark up and gross margin. Could anyone help me? thank you so much