Fatima is a sole trader who sells goods at a mark-up of 25% on cost. The following information relates to the year ended 31 March 2025. $ Opening inventory ...

(a) Cost of sales

Cost of sales is calculated as opening inventory plus purchases minus closing inventory.

Cost of sales = $14 000 + $192 000 - $16 000 [1] = $190 000 [1]

(b) Revenue using the mark-up percentage

A mark-up of 25% on cost means the selling price is 125% of cost. The revenue is therefore found by multiplying cost of sales by 125/100.

Revenue = Cost of sales x 125/100 [1]

Revenue = $190 000 x 1.25 [1] = $237 500 [1]

(c) Gross profit

Gross profit is the difference between revenue and cost of sales.

Gross profit = $237 500 - $190 000 = $47 500 [1][1]

(d) Gross profit margin

The gross profit margin expresses gross profit as a percentage of revenue (not cost). This is different from mark-up, which is expressed as a percentage of cost.

Gross profit margin = (Gross profit / Revenue) x 100 [1][1]

= ($47 500 / $237 500) x 100 = 20% [1]

Note the relationship: a 25% mark-up on cost always produces a 20% margin on revenue, because the profit ($47 500) is a larger fraction of cost ($190 000) than of the higher revenue figure ($237 500).

(e) Income statement

The income statement must include correct headings (the trader's name and accounting period) [1] and all figures must be clearly labelled [1].

(f) Difference between mark-up and margin

Mark-up is the profit expressed as a percentage of cost of sales (cost price). [1]

Mark-up = (Gross profit / Cost of sales) x 100 [1]

Margin is the profit expressed as a percentage of revenue (selling price). [1]

Margin = (Gross profit / Revenue) x 100 [1]

Both measure profitability, but they use different bases. For the same transaction, the mark-up percentage will always be higher than the margin percentage because cost of sales is always less than revenue.