A retailer sells goods at a mark-up of 25% on cost. Cost of sales for the year was £120,000. What are sales and the gross profit margin?
Answer and explanation
Correct answer: D. Sales £150,000 and gross profit margin 20%
- Step 1: Sales = cost × 1.25 = £120,000 × 1.25 = £150,000.
- Step 2: Gross profit = £150,000 − £120,000 = £30,000.
- Step 3: Margin = £30,000 ÷ £150,000 = 20%.
Answer
Sales £150,000 and gross profit margin 20%.
Why not the others: Mark-up is based on cost, but margin is based on sales: £30,000 ÷ £150,000 = 20%. This divides cost by 0.75, which treats 25% as a margin and not as a mark-up. This treats the £120,000 of cost of sales as if it were sales.
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