Question

Compute net sales, gross profit, and the gross margin ratio for each separate case a through d. Interpret the gross margin ratio for case a.

	a	b	c	d
Sales	\(150,000	\)550,000	\(38,700	\)255,700
Sales discount	5,000	17,500	600	4,800
Sales return and allowances	20,000	6,000	5,100	900
Cost of goods sold	79,750	329,589	24,453	126,500

Short answer

Cases	Gross margin ratio
a	36.2%
b	37.4%
c	25.9%
d	49.4%

Step-by-step solution

Definition of Financial Ratios

Comparison of different line items of financial statements made by analysts to interpret the financial performance of a business entity is known as financial ratios.

Calculation of net sales, gross profit, and gross margin ratio

	a	b	c	d
Sales	$150,000	$550,000	$38,700	$255,700
Less: Sales discount	(5,000)	(17,500)	(600)	(4,800)
Less: Sales return and allowances	(20,000)	(6,000)	(5,100)	(900)
Net sales	125,000	526,500	33,000	250,000
Cost of goods sold	(79,750)	(329,589)	(24,453)	(126,500)
Gross profit	$45,250	$196,911	$8,547	$123,500

Cases	Gross profit	/	Net sales	=	Gross margin ratio
a	$45,250	/	$125,000	=	36.2%
b	$196,911	/	$526,500	=	37.4%
c	$8,547	/	$33,000	=	25.9%
d	$123,500	/	$250,000	=	49.4%

Interpretation of gross margin ratio

The gross margin ratio in case “a” is 36.2%, reflecting that the business entity is able to convert its 36% of net sales into gross profit.