Synoptic revision

nicolasimpson1988 · September 2017

Can some help with the following please?
At 31st Dec 2006 closing inventory was valued at £44500
Expected sales in 2007 £2560000, inventory expected to rise by 20% by year end. Gross margin 60% after deducting cost of sales. Production overheads are £280000. What is the amount spent and materials and labour.

rarah · September 2017

Hi,

Best way to work this question out is first working out the cost of sales.

So if you know the gross margin is 60% of the sale then the cost of sales will be 40%.

You then work out the 20% rise on inventory, this amount is only on the closing inventory amount of 44500.

If you then add that 20% with the cost of sales it will be your estimated spend on materials and labour.

I hope this helps you a little bit.

Ellada · September 2017

Good question.
My workings:
100% Sales £2560000
40% Cost of Sales £10240000 (2560000x40%), which includes direct mat-s and labour
60% Margin (Gross profit) £1536000 (2560000x60%)

From my point of view:
Cost of Sales = Opening inv-ry + Direct mat/labour + prod.overheds - Clos.inv.
£1024000 = £44500 + X + £280000 - £53400, where 53400 is clos inv., 44500*20%

X = £1024000 - £44500 - £280000 + £53400, so X (direct mat/labour) = £752900

Hopefully, I resolved it correctly.

Guys, please, can someone tell me if there are any mistakes?

Ellada · September 2017

nicolasimpson1988 said:
Can some help with the following please?
At 31st Dec 2006 closing inventory was valued at £44500
Expected sales in 2007 £2560000, inventory expected to rise by 20% by year end. Gross margin 60% after deducting cost of sales. Production overheads are £280000. What is the amount spent and materials and labour.

Do you have correct answer?

nicolasimpson1988 · September 2017

Perfect, that's seems to be right. So easy now you've explained.

Thanks

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