The diagram shows how Riverside Toys prepared its profit statement. The business makes wooden learning products for children and has received an order from ...
Question 1 Report
The diagram shows how Riverside Toys prepared its profit statement. The business makes wooden learning products for children and has received an order from a large retailer similar to IKEA. Management needs to decide whether to accept the order at a lower selling price. Sales revenue is $600 000. The cost of timber, packaging and production wages is $390 000. Operating expenses, including shop rent, marketing and salaries, are $150 000. The finance manager says that the information should be used with knowledge of the business's previous results before a final decision is made.
(a) State the name given to sales revenue less cost of sales. [1]
(b) Define operating expenses. [1]
(c) Calculate Riverside Toys' net profit for the year. Show your working. [3]
(d) Analyse whether Riverside Toys should accept the lower-priced IKEA-style order. [5]
Answer Details
(a) Sales revenue less cost of sales is gross profit. [1]
(b) Operating expenses are costs of running the business that are not direct costs of making the goods sold, such as rent, marketing and salaries. [1]
(c) \[\text{Gross profit}=\$600000-\$390000=\$210000\] \[\text{Net profit}=\$210000-\$150000=\$60000\] Riverside Toys' net profit is $60,000. [3]
(d) The order could increase sales revenue and output. If Riverside has spare capacity, additional revenue may raise total profit even though the selling price is lower. However, a lower price may reduce gross profit margin. A large retailer may also demand low prices or strict payment terms, affecting cash flow. Riverside should calculate the extra contribution from the order and compare it with spare capacity and previous profit margins before accepting. [5]
Download The App On Google Playstore
Everything you need to excel in your exams
