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Dear Tutor,
I’m having trouble understanding the answer to this 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”The answer is C. Could you please explain to me in detail why C is right and the other options are wrong?
Thank you!
A – the level of inventory is of no relevance. On this alone the same mark-up would result in the same profit margin.
B – The markup is applied to whatever they actually paid for the purchases (after discount), and so again the same mark-up would result in the same profit margin.
C – The mark-up on what is actually sold remains the same, however the cost of goods would also include the cost of goods that ended up being wasted, which would mean that the overall profit margin was lower.
D – It doesn’t matter how high or low the revenue is. In % terms, the same mark-up would result in the same profit margin%
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