The gross profit margin ratio provides valuable insights into the profitability of Shedz's core business operations, offering a foundation for further financial analysis and decision-making.
Certainly! The gross profit margin ratio is a key financial metric that measures the percentage of sales revenue retained by a company after deducting the cost of goods sold (COGS).
It is an important indicator of a company's ability to generate profit from its core business activities.
The formula for calculating the gross profit margin ratio is:
Gross Profit Margin=(Gross ProfitSales)×100
Gross Profit Margin=( SalesGross Profit )×100
Given the information provided for Shedz:
Cost of Sales: £195,000
Gross Profit: £65,000
Let's calculate the gross profit margin:
Gross Profit Margin=(£65,000Sales)×100
Gross Profit Margin=( Sales£65,000 )×100
To find the sales, we can use the formula:
Sales=Cost of Sales+Gross Profit
Sales=Cost of Sales+Gross Profit
Sales=£195,000+£65,000=£260,000
Sales=£195,000+£65,000=£260,000
Now, substitute the values into the gross profit margin formula:
Gross Profit Margin=(£65,000£260,000)×100
Gross Profit Margin=( £260,000£65,000 )×100
Gross Profit Margin=(14)×100=25%
Gross Profit Margin=( 41 )×100=25%
Therefore, the gross profit margin ratio for Shedz is 25%.
Interpretation:
A gross profit margin of 25% means that for every pound of sales, Shedz retains £0.25 as gross profit after covering the cost of goods sold.
This ratio is a measure of the efficiency of Shedz in managing its production costs and pricing its products.
A higher gross profit margin indicates better profitability and effective cost management.
Shedz should monitor this ratio over time and compare it to industry benchmarks to assess its competitiveness and overall financial health.
question:
User
User
Shedz is a business that sells garden sheds and other wooden buildings. The sheds are sold online and they are delivered to customers using the company's vehicles.
The owner, Clare, has given you some information about the financial performance of the business. She has asked you to analyse this information using ratio analysis.
Extract of Financial Information for Shedz
Cost of sales
Gross profit
£
195 000
65 000
Expenses
13 000
Capital employed
416 000
Opening inventory
42 000
Closing inventory
36 000
DO NOT WRITE IN THIS AREA
10 (a) Calculate the gross profit margin ratio.
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