Harbour Homeware is a family business that sells kitchen products through a shop and website. Its owner is comparing two years of financial information befo...
Question 1 Report
Harbour Homeware is a family business that sells kitchen products through a shop and website. Its owner is comparing two years of financial information before deciding whether to expand the website. In Year 1, sales were $180,000, cost of sales was $108,000 and net profit was $18,000. In Year 2, sales rose to $210,000, cost of sales rose to $142,800 and net profit fell to $9,500.
The owner is pleased that more customers bought products, but she is concerned that discounting has reduced the average price. Delivery charges and website maintenance also increased. She needs to explain the results to her accountant and select an option that protects future profit.
(a) Calculate the gross profit for Year 2. [4]
(b) State one reason, using the information, why net profit may have fallen in Year 2. [2]
(c) Analyse whether Harbour Homeware should continue offering discounts to increase sales. [6]
Answer Details
(a) Gross profit is sales revenue minus cost of sales:
\[\$210,000-\$142,800=\$67,200\]
Year 2 gross profit is $67,200. [4 marks]
(b) Net profit may have fallen because delivery charges increased, website maintenance increased, or because discounting reduced the average selling price. Any one of these reduces the amount left after costs. [2 marks]
(c) Discounts may attract customers and increase sales revenue. Sales did rise from $180,000 to $210,000. However, cost of sales also rose to $142,800, reducing the gross profit margin, and net profit fell from $18,000 to $9,500 despite higher sales. Broad discounts can therefore create more workload and sales without improving final profit. Harbour Homeware should consider targeted discounts, or negotiate lower delivery and purchasing costs, rather than automatically discounting for all customers. [6 marks]
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