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Presentation/PPT
27/08/2022
(C) GROSS PROFIT PERCENTAGE METHODRamirez Distributors, Inc., supplies ice cream
shops with various toppings for making sundaes. On November 17, 2016, a pack of wild people
escaped from a weight-reduction spa broke into one section of the warehouse and ate all the toppings
resulting in a total loss of all toppings stored in that section. Ramirez Dist. Inc. must provide its
insurance company with an estimate of the amount of inventory lost. The following information is
available from the company’s accounting records:
Required: Calculate the estimated cost of each of the toppings lost in the melee:
(show your work) CkFig: Fruit Toppings lost = $10,000.
Fruit
Toppings
Marshmallow
Toppings
Chocolate
Toppings
Historical gross profit ratio 20% 30% 35%
Inventory, January 1, 2016 $ 20,000 $ 7,000 $ 3,000
Net purchases through Nov 17 150,000 36,000 12,000
Net sales through Nov. 17 200,000 55,000 20,000
ADDITIONAL CONSIDERATION: Watch out for “Mark-up on Cost”
In some circumstances you are given Mark-up on Cost %. Don’t make the mistake of thinking Mark-up on
Cost % is equivalent to the Gross Profit %. Accountants like to use the Gross Profit %, while non-accountant
business people may prefer to use Mark-up on Cost %. Luckily, with the simple formula identified as
below Mark-up on Cost % is easily converted to Gross Profit %. An example to further illustrate the
difference between Mark-up on Cost % versus Gross Profit % is provided next.
When I pay $60 for a skateboard that I plan to resell, I need to determine the price tag value. I always add 50%
of the cost ($30) to the cost and that is my selling price ($90). I sell the skateboard for $90. I employ a 50%
“Markup on Cost”. What “Gross Profit %” is implied by a 50% Markup on Cost?
Hint: Assume I sell that one skateboard, imagine the resulting Income Statement.
Income Statement Income Statement
for one skateboard sold as % of Sales
Net Sales Rev $
90 ⇒ Net Sales% 100 % ← Net Sales always @ 100%
CoGS $
60 ⇒ CoGS% 662⁄3% ← = $60 / $90
Gross Profit $
30 ⇒ Gross Profit% 331⁄3% ← = $30 / $90
Formula for converting “Markup on Cost %” to “Gross Profit %”:
Markup on Cost% / (100% + Markup on Cost%) = Gross Profit %
50% / (100% + 50%) = 331⁄3%
Thus, a Markup on Cost of 50% implies a Gross Profit % of 331⁄3%
Double check formula with formula :
Formula for converting “Gross profit %” to “Markup on cost %”?
Gross Profit% / CoGS as percent of Net Sales = Markup on Cost
331⁄3% / 662⁄3% = 50%Markup on Cost
Be careful to note which way the percentage is being stated. If stated as “Markup on Cost”, then convert to
“Gross Profit %”, then Gross Profit Method can be applied the usual way. See next problem.
Financial Accounting(Turck)—(9)SupEx(inventory)F18.docx Name (prepare on seperate
paper)
Use plenty of paper for this SupEx. 4
(D) GROSS PROFIT PERCENTAGE METHOD (CONTINUED)
(convert “Mark-up on Cost percent” given below to “Gross Profit percent”)
(review “ADDITIONAL CONSIDERATION” on the prior page!)
GLM Lumber Company handles three principal lines of merchandise with these varying rates of
markup on cost percentage:
Lumber 25%
Millwork 30%
Hardware and fittings 40%
On August 18, a fire destroyed all the lumber, millwork and even the hardware and fittings. To file
a report of loss for insurance purposes, the company must determine the cost values of inventories
on-hand immediately preceding the fire. No detail or perpetual inventory records of any kind were
maintained. The only pertinent information you are able to obtain are the following facts from the
general ledger, which was kept in a fireproof vault and thus escaped destruction.
Required: Submit your estimate of the inventory amounts immediately preceding the fire.
Show your work. To match the check figure(s) provided, you will need to round
Gross Profit Percentage to one figure to the right of the decimal point. (i.e., XX.X%)
Lumber Millwork Hardware
Inventory, Jan 1, 2016 $ 250,000 $ 90,000 $ 45,000
Purchases to Aug. 18, 2016 1,500,000 375,000 160,000
Sales to Aug. 18, 2016 2,080,000 533,000 210,000
Est. of Ending Inventory $ 55,060 CkFig
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