Question 13E - Intermediate Accounting (Kieso)

Question

Gross Profit Method) Each of the following gross profit percentages is expressed in terms of cost. 1. 20%. 3. 331 /3%. 2. 25%. 4. 50%. Instructions Indicate the gross profit percentage in terms of sales for each of the above.

Step-by-Step Solution

Answer

Gross profit on sales are as follows: 

(1) 16.67%

(2) 20%

(3) 25%

(4) 33.33%

Calculation of gross profit on sales

(1) Gross profit on sales is calculated as follows: 

$\begin{array}{rcl}\mathrm{Gross} \mathrm{profit} \mathrm{on} \mathrm{selling} \mathrm{price}& =& \frac{\mathrm{Percentage} \mathrm{markup} \mathrm{on} \mathrm{cost}}{100\%+\mathrm{Percentage} \mathrm{markup} \mathrm{on} \mathrm{cost}}\\ & =& \frac{20\%}{100\%+20\%}\\ & =& 16.67\%\\ & & \end{array}$

Calculation of gross profit on sales

(1) Gross profit on sales is calculated as follows: 

$\begin{array}{rcl}\mathrm{Gross} \mathrm{profit} \mathrm{on} \mathrm{selling} \mathrm{price}& =& \frac{\mathrm{Percentage} \mathrm{markup} \mathrm{on} \mathrm{cost}}{100\%+\mathrm{Percentage} \mathrm{markup} \mathrm{on} \mathrm{cost}}\\ & =& \frac{25\%}{100\%+25\%}\\ & =& 20\%\end{array}$

Calculation of gross profit on sales

(1) Gross profit on sales is calculated as follows: 

$\begin{array}{rcl}\mathrm{Gross} \mathrm{profit} \mathrm{on} \mathrm{selling} \mathrm{price}& =& \frac{\mathrm{Percentage} \mathrm{markup} \mathrm{on} \mathrm{cost}}{100\%+\mathrm{Percentage} \mathrm{markup} \mathrm{on} \mathrm{cost}}\\ & =& \frac{33{\displaystyle \frac{1}{3}}\%}{100\%+33{\displaystyle \frac{1}{3}}\%}\\ & =& 25\%\end{array}$

Calculation of gross profit on sales

(1) Gross profit on sales is calculated as follows: 

$\begin{array}{rcl}\mathrm{Gross} \mathrm{profit} \mathrm{on} \mathrm{selling} \mathrm{price}& =& \frac{\mathrm{Percentage} \mathrm{markup} \mathrm{on} \mathrm{cost}}{100\%+\mathrm{Percentage} \mathrm{markup} \mathrm{on} \mathrm{cost}}\\ & =& \frac{50\%}{100\%+50\%}\\ & =& 33.33\%\end{array}$

Thus, gross profit for case 1, 2, 3, and 4 equals 16.67%, 20%, 25% and 33.33% respectively.