Chapter 9, Problem 9.10E

To determine

Concept Introduction:

Gross profit

Gross profit is the profit left with a company after deduction of all the costs incurred for creating or selling a product or for providing a service. Gross profit is presented on the income statement of the company and can be calculated using the following formula:

  $GrossProfit=NetSales-Costofgoodssold$

Gross profit can also be computed with the help of formula given below:

  $Grossprofit=Sales\times GrossProfitRatio$

Cost of goods sold Cost of goods sold is the costs incurred for manufacturing or acquiring the products sold by a company in a given year. It includes all the direct costs incurred for the products sold. It can be calculated using the given formula:

  $Costofgoodssold=Sales-GrossProfit$

Requirement 1:

To calculate:

Gross profit and cost of goods sold for fiscal 2016

Answer to Problem 9.10E

Gross profit is coming out to be $187.2 million and Cost of goods sold as $412.8 million

Explanation of Solution

Firstly, Gross profit is calculated with the help of formula given below:

  $Grossprofit=Sales\times GrossProfitRatio$

In the given problem, it is given that sales are $600 million and Gross profit ratio as 31.2%.

  $Thus,Grossprofit=\$600million\times 31.2\%=\$187.2million$

Further, Cost of goods sold can be calculated using the given formula:

  $Costofgoodssold=Sales-GrossProfit$ Sales are given as $600 million in the given problem and we have calculated Gross profit at $187.2 million. Thus, Cost of goods sold would be:

  $Costofgoodssold=\$600million-\$187.2million=\$412.8million$

Therefore, Gross profit is coming out to be $187.2 million and Cost of goods sold as $412.8 million.

To determine

Concept Introduction:

Cost of goods sold Cost of goods sold is the costs incurred for manufacturing or acquiring the products sold by a company in a given year. It includes all the direct costs incurred for the products sold. It can be calculated using the given formula:

  $Costofgoodssold=Sales-GrossProfit$

Cost of goods sold if expressed in percentage form is termed as Cost of goods sold ratio and can be computed as below:

  $Costofgoodssoldratio=100\%-GrossProfitRatio$

Requirement 2:

To calculate:

Selling price for new product

Answer to Problem 9.10E

Selling price to be set for new product= $2,375

Explanation of Solution

To calculate Selling price for new product, firstly Cost of goods sold ratio would be calculated using the following formula:

  $Costofgoodssoldratio=100\%-GrossProfitRatio$

It is given that Gross profit ratio is 31.2%, thus, cost 0f goods sold ratio would be:

  $\text{Cost of goods sold ratio= 100\%- 31}\text{.2\%= 68}\text{.8\%}$

To calculate the selling price, following equation would be used:

  $Sellingprice=Costofproduct/Costofgoodssoldratio$

It is given that cost of product is $1,634 and cost of goods sold ratio has been calculated as 68.8%. Now, selling price that must be set for the new profit would be calculated as follows:

Calculation of selling price for new product

Particulars	Amount (in $)
Cost of product	1,634
Cost of goods sold ratio	68.8%
Selling Price	$2,375

Thus, the selling price that must be set for new product would be $2,375.

To determine

Concept Introduction:

Gross profit Gross profit is the profit left with a company after deduction of all the costs incurred for creating or selling a product or for providing a service. Gross profit is presented on the income statement of the company and can be calculated using the following formula:

  $GrossProfit=NetSales-Costofgoodssold$

Gross profit can also be computed with the help of formula given below:

  $Grossprofit=Sales\times GrossProfitRatio$

Cost of goods sold Cost of goods sold is the costs incurred for manufacturing or acquiring the products sold by a company in a given year. It includes all the direct costs incurred for the products sold. It can be calculated using the given formula:

  $Costofgoodssold=Sales-GrossProfit$

Cost of goods sold if expressed in percentage form is termed as Cost of goods sold ratio and can be computed as below:

  $Costofgoodssoldratio=100\%-GrossProfitRatio$

Requirement 3:

Usage of the information for management

Answer to Problem 9.10E

Gross profit ratio is used by the managers to estimate whether the firm is operating at a level of sales that will lead to profitability. Also, gross profit ratio is used to set the selling prices of products.

Explanation of Solution

Gross profit ratio is a measure of the amount of each sales dollar that is available to cover operating expenses and profit and therefore is used by the manager to estimate whether the firm is operating at a level of sales that will lead to profitability.

Also, gross profit ratio is used to set the selling prices of products. If the manager knows the gross profit ratio required to achieve profitability, the cost of the item can be divided by the gross profit ratio to arrive at selling price.