apply the techniques of mark-up, margin and inventory turnover to arrive at missing figures
📚 5.6 Incomplete Records – How to Fill in the Gaps
Think of it like solving a mystery with clues!
🔍 1. Quick Recap of Key Terms
- Mark‑up: The amount added to the cost price to obtain the selling price.
Formula: $ \text{Mark‑up} = \text{Selling Price} - \text{Cost Price} $ - Margin (Profit Margin): The percentage of the selling price that is profit.
Formula: $ \text{Margin} = \frac{\text{Profit}}{\text{Selling Price}} \times 100\% $ - Inventory Turnover: How many times inventory is sold and replaced over a period.
Formula: $ \text{Turnover} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}} $
🧩 2. Analogy: The Grocery Store Puzzle
Imagine a grocery store that knows how much it sells (selling price) and how many items it sold last month (units sold), but forgets the cost of those items. By using the mark‑up and margin, the store can back‑calculate the missing cost and then figure out how many items were on hand at the start and end of the month.
📈 3. Step‑by‑Step Example
Problem: A shop sold 200 units of a product last month. The selling price per unit was £15. The profit margin was 40 %. The inventory turnover was 4 times. Find the cost price per unit and the average inventory.
- Calculate profit per unit using the margin: $ \text{Profit} = \text{Margin} \times \text{Selling Price} = 0.40 \times 15 = £6 $
- Find the cost price per unit (selling price minus profit): $ \text{Cost Price} = 15 - 6 = £9 $
- Compute COGS for the month: $ \text{COGS} = \text{Cost Price} \times \text{Units Sold} = 9 \times 200 = £1{,}800 $
- Use the inventory turnover to find average inventory: $ \text{Average Inventory} = \frac{\text{COGS}}{\text{Turnover}} = \frac{1{,}800}{4} = £450 $
- If the shop started the month with £400 worth of stock, the ending inventory is: $ \text{Ending Inventory} = \text{Average Inventory} \times 2 - \text{Starting Inventory} = 450 \times 2 - 400 = £500 $
| Item | Value (£) |
|---|---|
| Selling Price per unit | 15 |
| Profit per unit | 6 |
| Cost Price per unit | 9 |
| COGS | 1,800 |
| Average Inventory | 450 |
| Ending Inventory | 500 |
💡 4. Examination Tips
- Always write down what you know before starting calculations.
- Check that the units match (e.g., £ per unit, units sold).
- Remember: Margin = Profit ÷ Selling Price – if you’re given margin, multiply by selling price to get profit.
- For inventory turnover, COGS ÷ Average Inventory = Turnover. Rearrange to find the missing figure.
- Show all steps clearly – examiners look for logical reasoning.
📌 5. Summary
When records are incomplete, treat the missing numbers like puzzle pieces. Use the relationships between mark‑up, margin and inventory turnover to deduce the missing figures. Practice with different scenarios to build confidence – the more you solve, the faster you’ll spot the clues!
Revision
Log in to practice.