Question

1. Calculate Revenues, COGS, Gross Profit and Gross Margin in year 2 based on the

following:

Yr. 1

Revenues 500

COGS 400

Gross Profit 100

Gross Margin 20%

Sales rise 5%, 3% due to increase in volume and 2% due to increase in price. COGS is 80% variable.

2. What is the primary driver of sales growth for the following company? Explain.

Assume COGS is 60% variable.

Yr. 1 Yr. 2

Revenues 800    850

COGS 500 519

Gross Profit 300 331

Gross Margin 37.5% 38.9%

Answer 1

Answer 1:

Revenues : 525.30

COGS: 409.60

Gross Profit : 115.70

Gross Margin : 22.03 %

Computations are provided in below table:-

S. NO	Particulars	Year 1	Year 2	Explanation regarding computations of year 2
A	Revenues	500	525.3	Year 1 Sales * 1.02 *1.03
	COGS- Variable	320	329.6	Year 1 COGS * 1.03
	COGS- Fixed	80	80	Same as Year 1
B	COGS	400	409.6
C= A - B	Gross Profit	100	115.7
D = C/A	Gross Margin	20.00%	22.03%

Answer 2

Given: 2 years data

We know that

Contribution = { Change in Profit/ Change in Sales]

= { (331-300)/ ( 850 - 800)}

= 62% of sales

This imples Variable cost ratio = 38 % of sales

Further,

Varaible COGS for year 1 = 800*0.38 = 304

Varaible COGS for year 1 = 850*0.38 = 323

% Chnage in variable volume = % change in variable COGS = { (323 - 304)/ 304) } * 100

% Chnage in variable volume = 6.25%

Now, if we see Total % change in sales = (50/800)*100

= 6.25 %

This implies 100 % og growth in sale is due to change in volume only

Change in volume is primary driver of sales growth