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Hello Tutor,
I watched your tutorial video and want to say thank you for your clear explanation on the topic of markup and margin. But I have some unclear thought over this question.
1. I understand that markup is Gross Profit (GP)/COGS and margin is GP/Sales. Wastage is recorded as an expense during the period, is it not? If so, when the 2 stores have the same markup, they should also have the same margin. The only difference is their net profit margin due to the effect of wastage expense. Do I understand it correctly?
2. If a yes for my question above, can you please explain why the answer for this question is (C)?
Thank you tutor!
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.Strictly the correct way of dealing with wastage is as you have written.
However it is common in practice to simply record in the calculation of the gross profit the actual closing inventory (i.e. after wasteage). Although this is not strictly correct presentation, it is the only one of the four choices in the question that could be the reason.
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