Understanding Profit Markups & Margins Calculation could be very helpful to enrich your accounting concepts. They also comes in a tricky way as MCQs & MTQs.
In this Profit Margin Quiz that I posted earlier on Fb.com/AccountingQuizzes you are required to Calculate Sales from the Given data.
Calculation of Sales – Profit Margin Quiz Explained
Do you Know what is Profit Margin? It is the measure of profitability calculated by dividing net profit with sales revenue.
Profit Margin = Net Profit / Sales Revenue
Here is a very detailed working of how to arrive at the sales figure from the data given in the quiz.
Sales x Profit Margin = Net Profit
Sales x Profit Margin = Sales – Cost of Goods Sold
Cost of Goods Sold = Sales – Sales x Profit Margin
Cost of Goods Sold= Sales (1-Profit Margin)
Sales = Cost of Goods Sold / (1 – Profit Margin)
Sales = COGS/(1-Margin %)
Before moving further lets calculate the Cost of Goods Sold,
COGS=Op.Stock + Purchases – Cl.Stock
Now we can continue our detailed working of calculating sales from COGS & Profit Margin.
Sales = $5000/(1-20%)
Sales = $5000/(1-0.2)
Sales = $5000/(0.8)
Sales = $6250
So, the value of Sales is $6,250. We can cross check it by multiplying this sales figure with profit margin to reach profit and then subtracting that profit from sales to arrive at COGS.
Hope you have found it a good accounting read on calculation of Sales from Profit Margin data. I have tried to mention all the necessary details as possible. You can further ask any question in your comments here or at our facebook accounting quizzes page. Feel free to participate in Accounting Quizzes.