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:
Gross profit can also be computed with the help of formula given below:
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:
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:
In the given problem, it is given that sales are $600 million and Gross profit ratio as 31.2%.
Further, Cost of goods sold can be calculated using the given formula:
Therefore, Gross profit is coming out to be $187.2 million and Cost of goods sold as $412.8 million.
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:
Cost of goods sold if expressed in percentage form is termed as Cost of goods sold ratio and can be computed as below:
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:
It is given that Gross profit ratio is 31.2%, thus, cost 0f goods sold ratio would be:
To calculate the selling price, following equation would be used:
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.
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:
Gross profit can also be computed with the help of formula given below:
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:
Cost of goods sold if expressed in percentage form is termed as Cost of goods sold ratio and can be computed as below:
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.
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Chapter 9 Solutions
Accounting: What the Numbers Mean
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