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Newmarket’s revenue as shown in its draft statement of profit or loss for the year ended 31 December 20X9 is $27 million. This includes $8 million for a consignment of goods sold on 31 December 20X9 on which Newmarket will incur ongoing service and support costs for two years after the sale.
The supply of the goods and the provision of service and support are separate performance obligations under the terms of IFRS 15 Revenue from contracts with customers. The cost of providing service and support is estimated at $800,000 per annum. Newmarket applies a 30% mark-up to all service costs.
At what amount should revenue be shown in the statement of profit or loss of Newmarket for the year ended 31 December 20X9? (Ignore the time value of money.)The answer is $24,920,000 and calculated as 27,000,000 – (800,000 * 2 * 130%).
I understand that the service is deducted from the revenue as it is not provided however, I want a better understanding to the workings. Particularly why is it 130% when mark up is 30%? And why is it being calculated this way?
Hi,
A 30% mark up means that the selling price it 30% higher than the costs incurred. So, if we incur costs of 100 then the selling price will be 130 (i.e. 100 x 1.3). If you’re curious as to the 1.3 figure then this is the 0.3 plus 1.
In this instance the total selling price is the $27 million, which includes goods and services. To get the value of the goods we need to deduct the selling price of the services. In this instance the service costs $800,000 per year and is for two years, hence the 800 x 2 in the working. This however gives us the total cost and we need the total revenue. To get the total revenue then we need to apply the cost structure, which is where we multiply by the 1.3 (i.e. 100% of the costs plus 30%, which when we put in decimals is 1 plus 0.3 giving the 1.3).
Hope that helps clear it up.
Thanks,
Chris
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