If Larry’s Lobsters saw net sales of $100,000 and they had goods available for sale of $80,000, with an ending inventory of $40,000, what is the gross profit margin of Larry’s Lobsters?
Explanation
Answer - D - The company would have a gross profit margin of 60%.
COGS = Goods Available for Sale − Ending Inventory (COGS = 80,000 − 40,000)
Gross Profits = Net Sales − COGS (Gross Profit = 100,000 − 40,000)
Gross Profit Margin = Gross Profit / Net Sales (Gross Profit Margin = 60,000 / 100,000) = 60%
Key Takeaway: Usually, word problems will take more than one calculation. Take the last piece of information that is requested, determine which formula or method to use, and work backwards using the information available.
Gross Profit Margin = Gross Profit / Net Sales (Gross Profit Margin = Gross Profit / 100,000)
= 60%
Gross Profits = Net Sales − COGS (Gross Profit = 100,000 − COGS)
COGS = Goods Available for Sale − Ending Inventory (COGS = 80,000 − 40,000)
