A Company Shows The Following Balances | What Is The Gross Profit Rate?

Importance Of Profits For Company’s Business

A company (corporation) needs to earn profits in order to run the business, to grow it and to stabilize it. Running a business in loss will surely close it one day. That is why, the company started the business to earn profits during the accounting period.

The correct option of this multiple choice question (mcq) is (C) as proved below:

We are given the following:

Gross Sales = $800,000

Cost of Goods Sold = $490,000

We are required to calculate gross profit rate.

Here we need to calculate the value of net sales, so we have the following:

Net Sales = Gross Sales - Sales Returns and Allowances - Sales Discounts

Both sales returns and allowances and sales discounts are contra revenue account, so these are deducted from gross sales to calculate net sales for the current accounting period.

Net Sales = $800,000 - $75,000 - $25,000 = $800,000 - $100,000 = $700,000

Amount of Gross Profit = Net Sales - Cost of Goods Sold = $700,000 - $490,000 = $210,000

We will utilize the following formula for the calculation of gross profit rate as shown below:

Gross Profit Rate = Amount of Gross Profit / Net Sales X 100

Gross Profit Rate = $210,000 / $700,000 X 100 = .3 X 100 30%

Here Sales Rate is 100% as it is the base on which gross profit is calculated.

Sales rate is equal to the sum of cost goods sold rate and GP rate i.e., 100% = 70% + 30%

So, GP rate is 30%

Here cost goods sold rate is 70% and sales rate is 100%. So, we also have:

GP Rate = Sales Rate - Cost of Goods Sold Rate 100% - 70 % = 30%

The other options (A, B and D) are wrong choices of this multiple choice question here.