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On 1 April 20X7 Possum Co acquired 60% of the share capital of Koala Co for $120,000. During the
year Possum Co sold goods to Koala Co for $30,000, including a profit margin of 25%. 40% of these
goods were still in inventory at the year end.
The following extract was taken from the financial statements of Possum Co and Koala Co at 31 March
20X8.
Possum Co Koala Co
$’000 $’000
Revenue 750 400
Cost of sales (420) (100)
Gross profit 330 300
What is the consolidated gross profit of the Possum group at 31 March 20X8?Unrealised profit (30,000 x25% x 40%) =3000
Gross profit (330 + 300 – 3)=627Why is PUP not ( 30000 – 30000/1.25 )*40% = $2 400? Because P sold to K FOR 30 000, 30 000 is the revenue, not the cost, so why does the answer treat the 30 000 as cost by calculating the profit = 30 000 * 25%?
It is not treating the 30,000 as the cost.
25% is the profit margin and this is the profit as a % of selling price. (Had it been a % of cost then it would be referred to as being a mark-up of 25%).
Do watch my free lectures on mark-ups and margins 🙂
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