What is the equation to be used here?

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avalon1163
avalon1163 Registered Posts: 11 Regular contributor ⭐
in AAT Level 3 (Level 6 in Scotland)
Hi,

I have the following situation: £92000 (no VAT) are the total sales and I know that the GP margin is 28%.

Therefore the GP margin is £25536 and the Cost of Goods is £65664 - so far so good.

BUT next question is: the inventory has increased by £4036 - calculate the Purchase figure.

I added the COS and the increase together because, in the absence of the formula, it appeared to be the only correct thing to do.

However, can anyone explain the reasoning behind this please? If I assume that the opening inventory is x AND I am looking for the purchase figure AND the closing inventory is x+4036 then I get the following:

COS = x + p - (x+4036)

Two variables!!

Help please!

Thank you very much,

Sibylle

Comments

  • uknitty
    uknitty Registered Posts: 591 Epic contributor 🐘
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    Think it through step by step in terms of what has actually happened rather than in terms of an equation.

    I find it easiest to start by asking myself what are my cost of sales ?

    I have some opening stock

    I purchase some more stock

    I still have some left in inventory at the end of the period so this isn't incluced in my cost of sales.

    In other words: Opening Stock + Purchases - Closing stock = Cost of Sales.

    You can rearrange this any way you like, so to get to purchases

    Purchases = Cost of Sales + Closing stock - opening stock

    If you think the rearranged forumula through the cost of what you purchased consists of:

    The stock you have sold + The stock you still have LESS the cost of what you already had when you started.

    Hope that makes sense....
  • clegganator
    clegganator Registered Posts: 184 Dedicated contributor 🦉
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    Indeed! Visualise the question. Imagine you are Joe Bloggs in X Ltd. Imagine the materials and the process you go through. You need to apply the learning to a situation, otherwise it is just words.
  • avalon1163
    avalon1163 Registered Posts: 11 Regular contributor ⭐
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    Thank you very much for taking the time to reply:

    all clear now.

    All the best,

    Sibylle

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