Fig. 1 shows extracts from the accounts of Northfield Furniture, a family business making desks for home offices. The directors are comparing 2025 with 2026...
Question 1 Report
Fig. 1 shows extracts from the accounts of Northfield Furniture, a family business making desks for home offices. The directors are comparing 2025 with 2026 before they select one of two options: reduce prices to gain market share or improve the quality of wood used. The information is shown in £000. The business needs to analyse both profit measures, not just the sales figure.
(a) Calculate gross profit for 2026. Show your working. [2]
(b) Calculate the gross profit margin for 2025 and for 2026. Show your working. [4]
(c) Calculate net profit for 2026. Show your working. [2]
(d) Analyse one reason why an increase in sales revenue has not necessarily improved Northfield Furniture’s profitability. Use Fig. 1. [4]
Answer Details
(a) Gross profit for 2026:
\[\pounds700\,000-\pounds455\,000=\pounds245\,000\]
Gross profit is £245,000. [2 marks]
(b) For 2025:
\[\pounds620\,000-\pounds372\,000=\pounds248\,000\]
\[\frac{248}{620}\times100=40\%\]
For 2026:
\[\frac{245}{700}\times100=35\%\]
The gross profit margins are 40% in 2025 and 35% in 2026. [4 marks]
(c) Net profit for 2026:
\[\pounds245\,000-\pounds168\,000=\pounds77\,000\]
Net profit is £77,000. [2 marks]
(d) Sales revenue increased from £620,000 to £700,000, but cost of sales increased from £372,000 to £455,000. Gross profit actually fell from £248,000 to £245,000, while gross profit margin fell from 40% to 35%. Thus, a larger proportion of each sale is being spent on materials or production, so increased sales have not improved profitability. [4 marks]
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