Question

In: Accounting

MBI, Inc., had sales of $6 million for fiscal 2016. The company's gross profit ratio for...

MBI, Inc., had sales of $6 million for fiscal 2016. The company's gross profit ratio for that year was 31.2%.

a. Calculate the gross profit and cost of goods sold for MBI, Inc. for fiscal 2016.

b. Assume that a new product is developed and that it will cost $1,634 to manufacture. Calculate the selling price that must be set for this new product if its gross profit ratio is to be the same as the average achieved for all products for fiscal 2016.

c. From a management viewpoint, what would you do with all this information?

Solutions

Expert Solution

a) Gross Profit = $6,000,000*31.2% = $1,872,000

Cost of goods sold = Sales - Gross Profit = $6,000,000-$1,872,000 = $4,128,000 i.e. 68.8% of sales

b) Cost of goods sold = $1,634.

If the gross profit ratio must remain at 31.2% then the sale price should be-

$1,634/(1-0.312) = $2,375

c) From the gross profit ratio, the management can derive the following insights -

  • The management can identify the amount that is left for other indirect expenses such as Selling, General & Administrative expenses
  • It allows the management to make a better comparison of itself with its competitors within the same industry. Also, it allows for a comparison with the industry average.
  • Companies that have high gross margins mostly tend to have efficient processes and effective operations
  • Management may also analyse the trend of gross profits over a few years to identify any potential fraud, mismanagement, increase in cost of inputs etc, as gross profits generally tend to stay stable over the years.

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