The following information relates to two retailers, Shop P and Shop Q, for the year ended 31 March 2025. Item Shop P ($) Shop Q ($) Revenue 180 000 240 000 ...
Question 1 Report
The following information relates to two retailers, Shop P and Shop Q, for the year ended 31 March 2025.
| Item | Shop P ($) | Shop Q ($) |
|---|---|---|
| Revenue | 180 000 | 240 000 |
| Opening inventory | 12 000 | 18 000 |
| Purchases | 110 000 | 175 000 |
| Closing inventory | 14 000 | 21 000 |
| Expenses | 28 000 | 22 000 |
| Trade receivables | 15 000 | 20 000 |
| Trade payables | 9 000 | 14 000 |
(a) For each shop, calculate: [8]
(i) cost of goods sold
(ii) gross profit
(iii) gross profit margin (to one decimal place)
(iv) mark-up (to one decimal place)
(b) For each shop, calculate the net profit and the net profit margin (to one decimal place). [4]
(c) Compare the profitability of the two shops. Identify which shop is more profitable and suggest one reason for the difference. [4]
(d) Calculate the trade receivables turnover in days for each shop (to the nearest whole day). [2]
(e) Suggest one action Shop P could take to improve its trade receivables turnover. [2]
Answer Details
(a) Calculations for Shop P and Shop Q
(i) Cost of goods sold
Cost of goods sold = Opening inventory + Purchases - Closing inventory
Shop P: $12 000 + $110 000 - $14 000 = $108 000 [1]
Shop Q: $18 000 + $175 000 - $21 000 = $172 000 [1]
(ii) Gross profit
Gross profit = Revenue - Cost of goods sold
Shop P: $180 000 - $108 000 = $72 000 [1]
Shop Q: $240 000 - $172 000 = $68 000 [1]
(iii) Gross profit margin
Gross profit margin = Gross profit / Revenue x 100
Shop P: 72 000 / 180 000 x 100 = 40.0% [1]
Shop Q: 68 000 / 240 000 x 100 = 28.3% [1]
(iv) Mark-up
Mark-up = Gross profit / Cost of goods sold x 100
Shop P: 72 000 / 108 000 x 100 = 66.7% [1]
Shop Q: 68 000 / 172 000 x 100 = 39.5% [1]
Mark-up expresses profit as a percentage of cost, while margin expresses it as a percentage of selling price. Shop P adds a much larger mark-up to its cost of goods.
(b) Net profit and net profit margin
Net profit = Gross profit - Expenses
Shop P: $72 000 - $28 000 = $44 000 [1]
Net profit margin: 44 000 / 180 000 x 100 = 24.4% [1]
Shop Q: $68 000 - $22 000 = $46 000 [1]
Net profit margin: 46 000 / 240 000 x 100 = 19.2% [1]
(c) Profitability comparison
Shop P has a higher gross profit margin (40.0% vs 28.3%) and a higher mark-up (66.7% vs 39.5%), indicating that P charges significantly more per unit relative to cost. This could be due to selling premium goods, operating in a less competitive location, or having better buying terms. [1]
Shop P also has a higher net profit margin (24.4% vs 19.2%), showing that despite higher expenses ($28 000 vs $22 000), its larger gross profit margin more than compensates. [1]
However, Shop Q generates a higher net profit in absolute terms ($46 000 vs $44 000) because its revenue is much higher ($240 000 vs $180 000). Q appears to follow a high-volume, low-margin strategy. [1]
A possible reason for the difference is that Shop Q operates on a competitive pricing strategy (lower margins but higher sales volume), while Shop P focuses on higher margins per unit, perhaps with a more niche or premium product range. [1]
(d) Trade receivables turnover in days
Trade receivables turnover = Trade receivables / Revenue x 365
Shop P: 15 000 / 180 000 x 365 = 30 days [1]
Shop Q: 20 000 / 240 000 x 365 = 30 days [1]
Both shops collect their debts in approximately the same time (30 days), suggesting similar credit terms offered to customers.
(e) How Shop P could improve its trade receivables turnover
Shop P could offer an early settlement discount (for example, a 2% discount for payment within 14 days) to encourage customers to pay sooner. [1] Alternatively, P could set stricter credit terms by reducing the credit period offered to customers, or follow up more promptly on overdue accounts with reminder letters and statements. [1]
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