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# Test 1 - 1.6D

Can anybody explain 1.6 (d) on the first test sample? I cannot work out the answer even when looking at the answer?

The question is: "A business with receivables of £120,000 and receivables collection period of 30 days, operates a gross profit margin of 25% and a net profit margin of 15%. Fixed production overheads constitute 40% of the cost of sales. Work out
Sales, Variable Production Costs, Fixed Production Costs, Cost of Sales, Gross Profit, Non-production costs and Operating costs..

Thank you so much in advance, my exam is next Wednesday.

• Hi

Because we know that Receivables £120,000 and Receivables Collection Period 30 days we can find out Sales. We have formula Receivables Collection Period = Receivables / Sales*365. So, 120000/Sales*365=30. Therefore, Sales = 120000*365/30=1460000.

Now we can find out Gross Profit using formula Gross Profit Margin=Gross Profit/Sales*100%.So, 25%= Gross Profit/1460000*100%. Therefore, Gross Profit = 25*1460000/100=365000.

Using formula Operating Profit Margin = Operating Profit/Sales*100%. we can find out Operating Profit. 15%= Operating Profit/1460000*100%. Therefore, Operating Profit=15*1460000/100=219000.

Cost of Sales = Sales- Gross Profit = 1460000-365000=1095000.
Fixed Production costs = Cost of Sales * 0.4= 438000.
Variable Production Costs = 1095000-438000=657000.
Non-production Costs= Gross Profit-Operating Profit = 365000-219000=146000.

I hope that helps.