KPI TO derive other figures

Hi there , please some help . How can we calculate cost of goods sold and gross profit , net profit when only information given is trade receivables , then selling and administration as a percentage of sales and net assets also given. Another information given is when calculating price there is 25% mark up on total cost . Where we can I study in detail using key performance indicators to derive other figures. Please some one help

Answers

  • Sunflower1o2Sunflower1o2 Posts: 9Registered, Tutor
    Hi Resmi,

    I do not think it is possible to calculate the gross profit and net profit from the information given.

    But let us see what we have . . .

    First we have trade receivables - assuming all of our sales are on credit, and we are given the average payment terms - we can ESTIMATE the sales for the year, as follows:-
    Trade receivables = customers that owe us for Sales that have been made. So for example if our trade receivables figures are £50,000 and our average payment period is one month, then we can assume that the outstanding figure is one twelfth of the full years sales. (Because we are paid within a month we should only expect to have one month's sales outstanding so we assume this is 1 month of a full year's sales 12 months.) Therefore a full month's sales is estimated to be £600,000 (50,000 x 12). (We can only make this estimate if we have the payment terms and we know all sales are on credit.)
    Then once we have the sales we can think about the other things.

    Mark-up on Cost - 25%
    Cost structure is as follows:-
    Sales -----------> 125% £600,000 (from example above)
    Cost of sales ---> 100% £480,000
    Gross profit -----> 25% £120,000

    Now we have the gross profit we can deduct the selling and administration expenses to get to the net profit.

    The information from your question did not state that sales were on credit or what the average payment terms were, you need this information to work out the answer.

    The best way to deal with these questions is write down the information you have and then try and piece together how you are going to find out what you need. Knowing your ratios helps.

    Remember: Mark-up is on cost and Margin is on sales.
    I am not sure what to advise with where to go for more information on how to do these questions, I would advise to practise as many questions as you can.

    Hope this helps
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