A head office invoices goods to its dependent branch at cost plus 25\%. At the end of the … — JAMB UTME

A head office invoices goods to its dependent branch at cost plus $25\%$ . At the end of the financial year, the branch holds closing inventory valued at $\text{N}20,000$ at invoice price. What is the amount of unrealized profit (stock reserve) contained in the closing inventory?

$\text{N}4,000$ Answer
B
$\text{N}5,000$
C
$\text{N}16,000$
D
$\text{N}25,000$

Answer

The unrealized profit contained in the branch closing inventory is

\text{N}4,000

Goods are sent to the branch at cost plus

25\%

, which means invoice price is

125\%

of cost. The profit element is

\frac{25}{125}

\frac{1}{5}

(

20\%

) of the invoice price. Applying

20\%

to the closing stock at invoice price (

\text{N}20,000

) gives

\text{N}4,000

as the unrealized profit (stock reserve).

Step-by-Step Solution

Convert the mark-up on cost to margin on invoice price.

Mark-up of

25\%

(

1/4

on cost) equals a margin of

20\%

(

1/5

on invoice price), using

\text{Margin} = \frac{\text{Mark-up}}{1 + \text{Mark-up}} = \frac{0.25}{1.25} = 0.20

Because the closing inventory figure is given at invoice price, the profit fraction must be applied to selling/invoice price.

Calculate the stock reserve (unrealized profit).

\text{Stock Reserve} = 20\% \times \text{N}20,000 = \text{N}4,000

Multiplying the margin percentage by the total invoice price extracts the profit loading component.

Key Concept

Calculation of Stock Reserve on Branch Closing Inventory at Invoice Price

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