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Dear Sir
I hope this message finds you well.
In the following 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?”I believed that the reason would be a difference in Cost of Sales.
the available answers were:
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.I chose B, because I believed that the Cake shop’s purchases were too high, leading to a high figure for cost of sales and thus a lower profit margin.
However the actual answer was C. Wastage.
Would you explain why ? Is it an issue of Closing Inventory being lower and thus Cost of Sales being higher ?Furthermore is there a link/relationship between Margin and Mark up ?
thanks in advance
regardsThere is certainly a link between margin and mark-up!!
Margin is the profit as a % of sales; mark-up is the profit as a % of cost.
(So a mark-up of 25% will mean a margin of 20%)
For more explanation of the two you should watch my free lecture on mark-ups and margins.B is wrong, because higher cost of sales means higher mark-up and higher sales, but in % terms the mark-up and margin will stay the same %.
C is correct. Not because wastage will affect inventory (it won’t!), it is because the mark-up will only be applied to the goods actually sold, but the cost of the goods bought is higher than the goods sold (because some are wasted).
Sorry, Sir.
I didn’t understand that.the ‘margin-profit’ is only for items that are sold.
but the cost of goods (Cost of Sales?) is Higher than anticipated because the wasted goods still carry the Cost of Sales but bring no profit.Since ‘Margin-profits’ are based on Sales and wasted products are un-sold products.
is that correct?
If not, i think i’m confused.
regardsThere is no such term as ‘margin profits’!!!
You are correct however in your second statement.
(And have you watched my lecture on mark-ups and margins?)
Dear Sir
I understand there is no such as thing as ‘margin profits’, I used the phrase to help in my own understanding.
I’ll go through your lecture again. I may have missed something the first time.
thanks for your help in this matter
kind regards
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