Mini Exercise – Revenue

Question 1

It’s a 3 year contract but only 6 months falls into the current year so the revenue related to the remaining 2.5 years needs to be removed from the revenue credited in the figure so far for the period ended 31 March, 2009

There are service and support costs of $1.2 million per year and the company achieves a normal gross profit of 40% on its services. Grossing that figure of $1.2 million per year up, we arrive at $2 million for each year

$1.2 million is 60% of the invoice value so $2 million is the invoice value and $800,000 is the profit. And, $800,000 is 40% of $2 million

So 2.5 years x $2 million = $5 million needs to be removed from the $16 million revenue figure given in the question

Question 3

If gross profit margin is 25%, then the cost to the company of providing the service must be 75% of the final invoice price. This is a three year contract but only one year has expired by 30 September, 2012 so we need to carry forward two years’ worth of invoice value

For each year we know that cost of service is $600,000 and that this figure represents 75% of the final invoice vale so, for each year, the invoice value must be $800,000 and for two years that gives us a figure to carry forward of $1.6 million

Clear now?