Question

Francis works for a local fly fishing shop. The shop allows employees to purchase two fly rods per year at a discount. This year Francis purchased one rod. The rod normally retails for $300, was purchased by the shop for $225, and sold to Francis for $250. If the average gross profit percentage of the shop's goods is 20%, what amount of the discount must be included in Francis' income?

A. $0
B. $25
C. $60
D. Some other amount.

Answer 1

Francis received a $20 discount on the fly rod because it was sold to him for $250 when the expected selling price for a 20% profit margin would be $270. This discount amount must be included in his income, which is not one of the answer choices given.

Step-by-step explanation:

Francis purchased a fly rod at a discounted price as an employee of a fly fishing shop. The retail price of the rod is $300, the shop purchased it for $225, and Francis bought it for $250. Since the shop's average gross profit percentage is 20%, we would calculate the expected selling price as 20% more than the shop's purchase price which would be $225 + 20% of $225 = $225 + $45 = $270. Francis' discount is the difference between the normal selling price ($270) and what Francis paid ($250), which is $20. Therefore, Francis must include $20 in his income, which is not one of the provided options.

The economic profit or loss for Francis or the shop in this transaction is not explicitly asked for, but it's important to understand that economic profit is calculated by subtracting both explicit and implicit costs from total revenue. If we were to consider the benefit the shop receives from employee satisfaction or long-term investment in employee retention as an implicit cost, this could also factor into the calculation of economic profit.