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mark-up and gross profit ratio

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FA – FIA FFA › mark-up and gross profit ratio

  • This topic has 3 replies, 2 voices, and was last updated 10 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • August 12, 2014 at 8:05 pm #189727
    mp-open
    Member
    • Topics: 96
    • Replies: 167
    • ☆☆☆

    Hallo,

    I have the following example, and am trying to understand the answers:

    The Port Elisabeth fishmonger and the Port Elisabeth bookseller both operate on a 50%
    mark-up on cost. However, their gross profit ratios are as follows.
    Fishmonger 25%
    Bookseller 33%

    a) there is more wastage with fish stocks than with book stocks
    A: The fishmonger’s gross profit margin may be low because of wastage
    My Q: How is wastage related to gross profit margin? Is it because we will have more lost inventory or higher inventory cost, consequently, Sales – CoGS => GP will be less?

    b) the fishmonger’s turnover is declining whereas that of the bookseller is
    increasing
    A: declining turnover would not directly affect the gross profit percentage
    My Q: Why doesn’t the declining turnover directly affect the gross profit percentage?
    The turnover is included in the calculation of Gross profit, it is not possible that a change in it, will not affect the gross profit percentage, or at least I don’t see how it will not affect it.

    Thank you!

    August 13, 2014 at 6:25 am #189772
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    (a)
    Let me explain with a little example.
    Suppose that both buy goods for $100, but Fish wastes 10% and Books waste nothing.
    Fish therefore actually only sells goods costing $90 and therefore charges 90 + 50% = $135. Books sells goods costing $100 and therefore charges 100 + 50% = 150.

    Therefore, Fish makes profit of 135 – 100 = $35. Profit margin is 35/135 = 25.9%
    Book makes profit of 150 – 100 = 50. Profit margin = 50/150 = 33.3%
    (Obviously the figures in the question are slightly different, but the principle remains the same)

    (b)
    Because the profit margin is a %, it is not directly affected by the level of turnover (sales). If they sell less, then the will buy less and therefore the % does not have to change.
    (Suppose in my earlier example, that next year demand falls by 50%. They will only buy $50 and will only have sales of $75. The profit % will be 25/75 – it will remain at 33.3%

    I hope that makes sense – if not then do ask again 🙂

    August 21, 2014 at 6:02 pm #191800
    mp-open
    Member
    • Topics: 96
    • Replies: 167
    • ☆☆☆

    Thank you very much for the full explanation!

    August 22, 2014 at 7:23 am #191839
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    You are welcome 🙂

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