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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!
(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 🙂
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