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Good Morning Sir,
May you please explain how to calculate the Gross Profit for the four years for Store S? This is the relevant part of the question:
“….The market in which CC operates has been growing steadily. Typically, PC’s stores generate a 40% gross profit margin.
CC has another store (store S) about to open in the south of the country. It has asked you for help in calculating the gross profit, net profit and ROI it can expect over each of the next four years. The following information is provided:
Sales in the first year will be 18,000 units. Sales volume will grow at 10% for years two and three but no further growth is expected in year 4. Sales price will start at $12 per unit for the first two years but then reduce by 5% per annum for each of the next two years.
Gross profit will start at 40% but will reduce as the sales price reduces. All purchase prices on goods for resale will remain constant for the four years.”
From my understanding: 20×8: 18000unitsx12=216000*40%=86400
20X9: 18000*1.1*12=237600*40%=95040Now for the 3rd and 4th year: 20Y0:18000*1.1*1.1=21780*12*0.95=248292*40%*0.95=94351
20Y1= 21780*11.4*0.95= 235877*38%*0.95=85152Please can you explain me how to calculate the 3rd and 4th year gross profit?
Thanks very nice,
FedeThis is a past exam question and so there is no need to type it out – just state the name of the question and the date of the exam.
For the first two years the selling price is $12 per unit and therefore the purchase cost is 60% x $12 = $7.20 per unit.
In the third year the selling price falls to $12 x 95% = $11.40 per unit. The purchase cost remains at $7.20 per unit, and therefore the profit is $4.20 per nits, which is a gross profit % of 4.20/11.40 = 36.84%
It is the same approach for the fourth year.
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