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I was preparing a consolidated statement of financial position and when I was trying to find the unrealised profit I ran into a problem
This is the information relevant
Premier(parent) had $2 million (at cost to Premier) of inventory that had been supplied in the post-acquisition period by Sanford as at 30 September 2020. Samford made a markup on cost of 25% on salesSo in order to find the profit on inventory I thought we needed to use markup and not convert the markup into margin since the inventory is stated to be given at cost “$2 million (at cost to Premier) ”
Therefore I just took 2 000 000 *25/100=500 000
However the correct answer had converted the markup into a margin instead and did
2 000 0000 *25/125= 400 0000Could you explain what actually went wrong there because I thought since the inventory is given at cost there is no need to convert the markup into a margin since markup can directly be applied at cost to find the profit
Hi,
If it is at cost to Premier then this is what it would have been sold to them for by Sanford, the subsidiary.
We then apply the 25% mark up to this sales value to work out the unrealised profit, hence the 25/125 x 2,000,000. The 25/125 is the standard cost structure adjustment for a mark up.
Sales 125%
Costs 100%
Profit 25%Thanks
But isn’t 25/125 when you convert from markup to margin
when it is markup it is 25/100 and we convert it to margin it is 25/125
Is that what was done here???No, I think you need to revisit your understanding on mark ups and margins.
A margin is where we apply the percentage to the sales revenue.
25% margin
Sales 100%
Costs 75%
Profit 25%A mark up is where we apply the percentage to the costs figure.
Sales 125%
Costs 100%
Profit 25%Thanks
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