Past exam question paper december 2008 question 1 part c

The workings for the revenue each year are shown in the examiners answer – the workings should make sense, but if not then ask again.
You can get the gross profit the way the examiners answer shows, or alternatively (and maybe more clear) you can work out the cost of sales each year and then subtract it from the revenue to get the gross profit.
The important thing for this is that although the gross profit % is 40% in the first year (and therefore the cost of sales is 60% of revenue in the first year), the cost per unit stays constant.
So….in the first year, the cost of sales is 60% x 216,000 = 129,600. In the second year, the volume is 10% higher and so the cost of sales will be 10% higher – 142,560. In the third year, 10% higher again, so the cost of sales will be 156,816. In the fourth year the volume does not grow and so the cost of sales will stay at 156,816.
If you subtract these from the revenues each year you will get the same gross profit as the answer.

The overheads are given in the question (70,000 in each of the first two years and then 80,000 a year). So this gives the net profit.

The investment is given in the question as 100,000. It depreciates at 25% of cost, so it reduces by 25,000 each year.

He subtracted the overheads from the gross profit to get the net profit.

You are welcome 🙂