No. 2(a) (i): Formulae and comments on the gross profit margin and the operating expenses/sales revenue ratios:
Gross Profit Margin:
The formula to compute gross profit margin is;
Gross profit x 100
The gross profit margin for the year ended 31st December 2017 was 24%. This means that for every $1 of sales revenue earned the business had $0.24 to help cover the expenses for that period. This is a 4% increase when compared to the gross profit margin of 2016 and thus a strength, or a positive thing for the business.
Operating Expenses/Sales Revenue:
The formula to compute operating expenses/sales revenue is;
Operating Expenses x 100
The operating expenses/sales revenue for the year ended 31st December 2017 was 11%. This means that for every $1 of sales revenue earned the business paid $0.11 towards expenses for that period. This is a 2% increase opposed to the $0.09 they paid in 2016. This may be perceived as a negative thing as it means that the expenses of the business increased during 2017. Please note however, that there may be a number of reasons for this such as increased sales resulting in increased expenses, and therefore may not necessarily be a sign of weakness.
No. 2(a) (ii): One recommendation for Sabrina Weeks in terms of improving her business’ performance:
Sabrina Weeks can review the expenses incurred by her business during 2017 to determine if she can cut back on any expenses. If she can do this it would allow her to retain more profits, thus improving business performance in this aspect.
No. 2(b): Calculation of Sabrina Weeks’ gross profit and cost of sales for the year 2017 using the ratios provided:
No. 2(c) (i): The formula to calculate the rate of inventory turnover is:
Inventory turnover = Cost of Sales
No. 2(c) (ii): Sabrina Weeks’ rate of inventory turnover for the year ended 31st December 2017 is:
Inventory turnover = Cost of Sales = 756,200 = 756,200 = 23.27 times
Average inventory (25,000 + 40,000) 32,500
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The author holds a Bsc (Hons) Degree in Applied Accounting from Oxford Brookes University, England and enjoys a successful career as an Accounting Supervisor and a private tutor.