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Question:
“An electrical store and a cake shop both have the same mark up on cost. However, the gross profit margin of the electrical store is significantly higher than that of the cake shop.
Which of the following is a possible reason for this?
A The cake shop has a higher turnover of inventory than the electrical store.
B The electrical store takes advantage of trade-discounts for bulk buying.
C The cake shop has a higher level of wastage of inventory than the electrical store.
D The cake shop’s revenue is increasing, while that of the electrical store is decreasing.”Dear John,
I think this is the wrong question, because of following reason:
– Mark-up = Profit/ Cost
2 businesses have a same mark-up ratio
=> Profit 1/ Cost 1 = Profit 2/ Cost 2
<=> Profit 1/ (Cost 1 + Profit 1) = Profit 1/ (Cost 2 + Profit 2)
<=> Profit 1/ Sales 1 = Profit 2/ Sales 2
=> Gross profit margin 1 = Gross profit margin 2– However, the question said that “Gross profit margin” in electrical store were significantly higher than that of the cake shop.
Therefore, I think it is the wrong question (Q 35.13 – BPP Revision kit F3 2016)
Please check the accuracy of the question and my argument. Thank you so much.
For each individual item, what you say is correct. If the mark-up is the same then the gross profit margin will be the same as well.
However, if they have wastage it does mean that even though everything they sell has the same mark-up on cost, the total cost of sales will be higher and therefore the total gross profit will be lower than it should be (and to the gross profit margin of the store (rather than on each individual sale) will be lower).
@johnmoffat said:
For each individual item, what you say is correct. If the mark-up is the same then the gross profit margin will be the same as well.However, if they have wastage it does mean that even though everything they sell has the same mark-up on cost, the total cost of sales will be higher and therefore the total gross profit will be lower than it should be (and to the gross profit margin of the store (rather than on each individual sale) will be lower).
The question said that they could have a same Mark-up ratio but different Gross profit ratio.
Therefore, I suppose it’s a wrong question.
In your point of view, do you think it’s also a wrong question?It is a confusing question (but not strictly wrong) and I am afraid that the same thing happens in the real exam.
This could be asked in the real exam, and although it is confusing it is helped by the fact that the other choices are certainly not correct.@johnmoffat said:
It is a confusing question (but not strictly wrong) and I am afraid that the same thing happens in the real exam.
This could be asked in the real exam, and although it is confusing it is helped by the fact that the other choices are certainly not correct.Thank you, and for this question, I think they simply suppose “gross profit margin of the electrical store is significantly higher than that of the cake shop”, and the candidate may choose C is the correct answer.
How does inventory wastage affect cost of goods sold? Can you please explain why other options are not valid. I’m confused. Thanks.
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