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Hi,
I’m hoping you can assist.
In part c, we had to calculate ROI. Why wasn’t depreciation subtracted from the profit when calculating the ROI?
But it was deducted.
If you read the question carefully, it says “Overheads, including depreciation, will be $70,000 for the first two years rising to $80,000 in years three and four.”
The depreciation is included in the overheads figures.
The examiners workings are a bit confusing.
Suppose sales were $100 in year 1, then the profit is $40 and the cost is $60.
In year 2, sales would stay at $100, in year 3 sales would be 5% lower so 95% x $100 = $95
In year 3, sales are another 5% lower, so 95% x $95 = $90.25The cost would stay at $60 every year.
So the profit in year 3 will be 95 – 60 = 35, and therefore the gross profit % = 35/95 = 36.842%
The profit in year 4 will be 90.25 – 60 = 30.25, and therefore the gross profit % = 30.25/90.25 = 33.518%I hope that helps 🙂
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