Assessment 1 Task 6 Decision &Control

EMMAHUTCHESON

Can anyone help with how to work out the sales figure from this question please?

Pian32

Written out the material becuase it was awkward to read on my computer.

Inventory Holding Period = 45 days (IHP)
Average Inventory = £225,000
Gross Profit Margin = 20%
Selling cost = 2% Sales
Admin cost = 3.5% sales
Net assets = £1837000

There are 2 steps to calculating the sales first you need to get the cost of sales which you can do from the inventory holding equation.

IHP = Inventory/Cost of sales *365
Cost of sales = Inventory/IHP *365
Cost of sales = 1,825,000

From this you can calculate the sales from the profit margin remembering that the Gross Profit = Sales - Cost of Sales. (Make sure you don't forget the *100 if working in %ages.


Profit Margin = Gross Profit/Sales *100 (%)
Sales * Profit Margin = (Sales - cost of sales)*100
Sales *20/100 = Sales - 1825000
0.8 Sales = 1,825,000
Sales = 2,281,250

EMMAHUTCHESON

Thank you, I get the COS calculation but not the rest?

Pian32

No problem I'll go through it in more detail.

Gross Profit Margin (%)= Gross Profit / Sales * 100

Combine this with

Gross Profit = Sales - Cost of Sales

Gross Profit Margin (%) = (Sales - Cost of sales) / Sales * 100

Divide both side by 100 which converts the margin to a decimal. Using the numbers from the question 20% -> 0.2

Gross Profit Margin (decimal) = (Sales - COS) / Sales

Rearrange the equation to get sales:

Sales * GPM = Sales - COS

COS + Sales * GPM = Sales

COS = Sales - Sales * GPM

Sales * (1-GPM) = COS

Sales = COS / (1-GPM)

Plug in the numbers:

Sales = 1,825,000 / (1-0.2)

= £ 2,281,250


It's all about rearranging formulea and merging equations where appropiate. You could technically cut out calculating the COS as well.

Effectively if the Gross profit margin is X% then the COS will be (100-X)% of Sales

MOSB

Pian32 said:

No problem I'll go through it in more detail.

Gross Profit Margin (%)= Gross Profit / Sales * 100

Combine this with

Gross Profit = Sales - Cost of Sales

Gross Profit Margin (%) = (Sales - Cost of sales) / Sales * 100

Divide both side by 100 which converts the margin to a decimal. Using the numbers from the question 20% -> 0.2

Gross Profit Margin (decimal) = (Sales - COS) / Sales

Rearrange the equation to get sales:

Sales * GPM = Sales - COS

COS + Sales * GPM = Sales

COS = Sales - Sales * GPM

Sales * (1-GPM) = COS

Sales = COS / (1-GPM)

Plug in the numbers:

Sales = 1,825,000 / (1-0.2)

= £ 2,281,250


It's all about rearranging formulea and merging equations where appropiate. You could technically cut out calculating the COS as well.

Effectively if the Gross profit margin is X% then the COS will be (100-X)% of Sales

thankyou, that's a big help.

I really hope one like this doesn't come up on the exam.....

Pian32

It's fairly likely I think. GPM is a very common ratio to need to use. Where you get the figures from could vary though.