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Difficulty: Very hardApplication of Mark-up and Margin in Estimating Cost of Goods Sold and Stock

Folake Enterprise operates a general merchandise store and maintains single-entry accounting records. On 31st October 2025, a fire outbreak destroyed part of her warehouse inventory. The accounting records reveal the following financial figures for the period:

- Opening inventory (1st January 2025): ₦60,000
- Purchases during the period: ₦350,000
- Carriage inwards: ₦18,000
- Returns outwards: ₦8,000
- Goods withdrawn by proprietor for personal use (at cost): ₦10,000
- Sales revenue: ₦470,000
- Returns inwards: ₦20,000

The business sets its selling prices by applying a uniform mark-up of 25% on cost. If undamaged inventory salvaged after the fire was valued at ₦18,000, what is the estimated cost of inventory destroyed by the fire?

  1. ₦32,000Answer
  2. B
    ₦54,500
  3. C
    ₦34,000
  4. D
    ₦50,000

Answer

The estimated cost of inventory destroyed by the fire is ₦32,000.
The correct answer is ₦32,000. Converting a 25% mark-up (1/4 on cost) gives a 20% margin (1/5 on sales). Net Sales are ₦450,000 (₦470,000 - ₦20,000), making Cost of Goods Sold ₦360,000 (80% of ₦450,000). Total goods available for sale equal ₦410,000 (₦60,000 opening stock + ₦350,000 net purchases after adding carriage inwards of ₦18,000 and subtracting returns outwards of ₦8,000 and drawings of ₦10,000). The total estimated closing inventory is ₦50,000 (₦410,000 - ₦360,000). Deducting the ₦18,000 salvaged inventory leaves ₦32,000 as the cost of destroyed inventory.

Step-by-Step Solution

1
Convert Mark-up on cost to Margin on sales
Margin = Mark-up / (1 + Mark-up) = 0.25 / (1 + 0.25) = 0.25 / 1.25 = 1/5 or 20% on sales.
Mark-up is based on cost price, whereas margin is based on selling price (net sales revenue).
2
Calculate Net Sales revenue
Net Sales = Gross Sales - Returns Inwards = ₦470,000 - ₦20,000 = ₦450,000.
Returns inwards (sales returns) must be deducted from total sales revenue.
3
Calculate Cost of Goods Sold (COGS)
Gross Profit = 20% of ₦450,000 = ₦90,000. COGS = Net Sales - Gross Profit = ₦450,000 - ₦90,000 = ₦360,000.
Deducting gross profit from net sales yields the cost of goods sold.
4
Calculate Net Purchases and Total Goods Available for Sale
Net Purchases = Purchases + Carriage Inwards - Returns Outwards - Goods Withdrawn = ₦350,000 + ₦18,000 - ₦8,000 - ₦10,000 = ₦350,000. Total Goods Available for Sale = Opening Inventory + Net Purchases = ₦60,000 + ₦350,000 = ₦410,000.
Carriage inwards increases purchase cost, while returns outwards and owner drawings at cost reduce goods available for sale.
5
Calculate Total Estimated Closing Stock and Destroyed Stock
Estimated Total Closing Stock = Total Goods Available for Sale - COGS = ₦410,000 - ₦360,000 = ₦50,000. Destroyed Stock = Estimated Closing Stock - Salvaged Stock = ₦50,000 - ₦18,000 = ₦32,000.
Subtracting undamaged salvaged inventory from estimated total inventory before the fire gives the actual loss.

Key Concept

Application of Mark-up and Margin in Estimating Inventory Loss
Estimated Time:3m 0s
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Topics

Application of Mark-up and Margin in Estimating Cost of Goods Sold and Stock

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