Question

Question:Adriana Co., with annual net sales of $5 million, maintains a markup of 25% based on cost. Adriana’s expenses average 15% of net sales. What is Adriana’s gross profit and net profit in dollars?

Short answer

The gross profit equals $1,000,000 and net profit equals $250,000.

Step-by-step solution

Step-by-step-solutionStep1:

Gross profit on selling price is calculated as follows :

$\mathbf{Gross}\mathbf{}\mathbf{Profit}\mathbf{}\mathbf{onSelling}\mathbf{}\mathbf{Price}\mathbf{=}\frac{\mathbf{Percentage}\mathbf{}\mathbf{Mark}\mathbf{}\mathbf{upon}\mathbf{}\mathbf{Cost}}{\begin{array}{rcl}& & \mathbf{100}\mathbf{\%}\mathbf{+}\mathbf{Percentage}\mathbf{}\mathbf{Markupon}\mathbf{}\mathbf{Cost}\\ & \mathbf{=}& \frac{\mathbf{25}\mathbf{\%}}{\mathbf{100}\mathbf{\%}\mathbf{+}\mathbf{25}\mathbf{\%}}\\ & \mathbf{=}& \mathbf{20}\mathbf{\%}\\ & & \end{array}}$

Step 2:

Gross profit is calculated as follows

$$\begin{gathered} \mathbf{Gross}\mathbf{}\mathbf{Profit}\mathbf{=}\mathbf{Net}\mathbf{}\mathbf{Sales}\mathbf{\times }\mathbf{Gross}\mathbf{}\mathbf{Profit}\mathbf{}\mathbf{on}\mathbf{}\mathbf{Selling}\mathbf{}\mathbf{Price} \\ \mathbf{=}\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{20}\mathbf{\%} \\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000} \end{gathered}$$

Step 3:

Net Profit is calculated as follows:

$$\begin{gathered} \mathbf{Net}\mathbf{}\mathbf{Profit}\mathbf{=}\mathbf{Gross}\mathbf{}\mathbf{Profit}\mathbf{-}\left(\mathbf{Net}\mathbf{}\mathbf{Sales}\mathbf{\times }\mathbf{Expenses}\mathbf{}\mathbf{Percentage}\right) \\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}\mathbf{-}\left(\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{15}\mathbf{\%}\right) \\ \mathbf{=}\mathbf{\$}\mathbf{250}\mathbf{,}\mathbf{000} \end{gathered}$$

Thus, gross profit is $1,000,000, and net profit equals $250,000.