[Jim Deal]

Can someone explain this to me. If you ran Becker’s calculated COGS at 20% profit margin you get: $220,000 * 1.20= $264,000 Sales Revenue which is not the $275,000 Sales figure given in the problem. I think that they goofed but I just want to make sure that I’m not missing something.

My calculation for the problem:

CALCULATED ANSWER: $275,000/1.20=$229,167+$30,000-$18,000=$241,167

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The following information was obtained from Smith Co.:

Sales $ 275,000

Beginning inventory 30,000

Ending Inventory 18,000

Smith’s gross margin is 20%. What amount represents Smith purchases?

a. $232,000

b. $202,000

c. $220,000

d. $208,000

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Becker Answer:

Explanation
Choice “d” is correct. Using the BASE account analysis format, purchases can be squeezed out as follows:
Beginning Inventory (given) 30,000
Purchases (squeezed) 208,000
Goods available for sale (added up) 238,000
COGS (275,000 x 1-.20) (220,000)
Ending Inventory (given) 18,000

 

 

[Anonymous]

I don't see any mistake with Becker's answer.

Gross margin is (Sales – COGS) / Sales. Your calculation would result in (275 – 229) / 275 = 16.7% as a gross margin, not the given 20%. So there's a mistake there. Whereas the given answer: (275 – 220) / 275 = 20% gross margin.

You know Sales are 275, you know the gross profit is 20% of that, which equals a gross profit of 55 (275 * 0.2). So COGS must be 275 – 55 = 220. That's what they're doing by calculating Sales times 0.8 (The 0.8 being 1 minus the gross margin of 20%) as COGS.

So you don't want to divide Sales by 1.2, you want to multiply it by 0.8. If 20% of sales is profit, then 80% must be cost. Additionally, your check for COGS should be 220 / 0.8 = 275, or either of the checks above where I verified gross margin.

Hope that helps!

[Jim Deal]

Thanks BobRobbins, I went back later and didn't have problems.

I'm attributing this to a marathon 100+MCQ's in one sitting, mental exhaustion, and blurring my calculations with DCF: CF/(1+r)^n. I was somewhere between the point of diminishing returns and total collapse.

Should probably incorporate a few more breaks.

[Author]

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