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mark-up and gross profit ratio

Mmp-open11y ago
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!
John MoffatJohn MoffatTutor11y ago#1
(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 :-)
Mmp-open11y ago#2
Thank you very much for the full explanation!
John MoffatJohn MoffatTutor11y ago#3
You are welcome :-)
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