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Accounting problem - please help !

Ashish shetty (Student CA IPC / IPCC) (222 Points)

28 October 2013

Hello,

I have few doubts in final accounts of cpt,please answer this question with explanation

1)A Company wishes to earn 20% profit margin on selling price.What will the profit mark up on cost,which will acheive the required profit margin ?

Answer given - 25% how ??

2)If sales is rs 2,000 and rate of gross profit on cost of goods sold is 25%,then cost of goods sold will be ?

Thanks in advance

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3 Replies

Rajiv Kaparthy (IPCC student) (41 Points)
Replied 28 October 2013

1) note this shortcut down first - if the profit margin is x/y on sale price, then it is x/y-x on cost price. or, if it is is x/y on cost price, then the margin is x/x+y on sale price. this quick formula will get get you through these problems in no time.

and as far as the explanation goes for the above shortcut, if the selling price is 120 and the profit mark up is 20% (20/100) on cost, then the cost price is obviously 100. now what is the profit margin on sales? it is nothing but the ratio of profit and selling price, so it is 20/120 or 16.6667%. note that the profit ratio is 20/100 on cost and 20/120 on sales and so, it follows the the shortcut i've mentioned.

2) sales = 2000, rate of profit on COGS = 25% = 25/100, which means profit ratio on sales = 25/125 or 20% now, 2000 - 2000*20% = COGS = 1600.

OR, you can use algebra - let cost be X, so, X+X*25% = sales => X(1+0.25) = 2000 => X= 2000/1.25 = 1600.

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Ashish shetty (Student CA IPC / IPCC) (222 Points)
Replied 28 October 2013

Originally posted by : rajiv
	1) note this shortcut down first - if the profit margin is x/y on sale price, then it is x/y-x on cost price. or, if it is is x/y on cost price, then the margin is x/x+y on sale price. this quick formula will get get you through these problems in no time. and as far as the explanation goes for the above shortcut, if the selling price is 120 and the profit mark up is 20% (20/100) on cost, then the cost price is obviously 100. now what is the profit margin on sales? it is nothing but the ratio of profit and selling price, so it is 20/120 or 16.6667%. note that the profit ratio is 20/100 on cost and 20/120 on sales and so, it follows the the shortcut i've mentioned. 2) sales = 2000, rate of profit on COGS = 25% = 25/100, which means profit ratio on sales = 25/125 or 20% now, 2000 - 2000*20% = COGS = 1600.