Fig. 1 shows the calculation route used by CityCycle, a retailer selling electric bicycles. The business buys goods on credit from a trade supplier. The sup...
Question 1 Report
Fig. 1 shows the calculation route used by CityCycle, a retailer selling electric bicycles. The business buys goods on credit from a trade supplier. The supplier gives a 15% trade discount from the list price of $400 000. CityCycle then pays delivery of $18 000. During the year it sells all the bicycles for $510 000. Shop wages, website costs, insurance and other expenses total $96 000. The owner uses the diagram to check the value paid for stock, gross profit and net profit before discussing a bank loan. All values shown are for one financial year.
(a) Which one of the following is the trade discount rate given by the supplier: 15%, $18 000 or $96 000? [2]
(b) Calculate the value of the trade discount. [4]
(c) Calculate the total price paid for the goods, including delivery. [4]
(d) Calculate CityCycle's gross profit for the year. [4]
(e) Calculate the net profit and explain why website and insurance costs are deducted after gross profit. [6]
Answer Details
(a) The trade discount rate is 15% [2]. A percentage is a rate; $18 000 is delivery cost and $96 000 is an operating-expense total.
(b)
\[\frac{15}{100}\times\$400\,000=\$60\,000\]
The trade discount is $60 000 [4].
(c) First deduct the discount from the list price, then add delivery:
\[\$400\,000-\$60\,000=\$340\,000\]
\[\$340\,000+\$18\,000=\$358\,000\]
Total price paid including delivery is $358 000 [4].
(d)
\[\text{Gross profit}=\$510\,000-\$358\,000=\$152\,000\]
CityCycle’s gross profit is $152 000 [4].
(e)
\[\text{Net profit}=\$152\,000-\$96\,000=\$56\,000\]
Net profit is $56 000 [4]. Website and insurance costs are deducted after gross profit because they are operating or overhead expenses, not direct costs of buying the bicycles [2].
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