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

Chinedu, a textile merchant in Aba, maintains single-entry accounting records. For the financial year ended 31st December 2025, his total sales were ₦120,000\text{₦}120,000. He fixes his selling prices by adding a mark-up of 25%25\% on cost. If his opening stock was ₦18,000\text{₦}18,000 and total purchases during the year amounted to ₦92,000\text{₦}92,000, what is the estimated value of his closing stock?

  1. ₦14,000\text{₦}14,000Answer
  2. B
    ₦20,000\text{₦}20,000
  3. C
    ₦22,000\text{₦}22,000
  4. D
    ₦30,000\text{₦}30,000

Answer

₦14,000\text{₦}14,000
To estimate closing stock from sales revenue, the 25%25\% mark-up on cost must first be converted to a margin on sales using Margin=Mark-up1+Mark-up=15\text{Margin} = \frac{\text{Mark-up}}{1 + \text{Mark-up}} = \frac{1}{5} (20%20\%). Gross profit is therefore 20%20\% of ₦120,000=₦24,000\text{₦}120,000 = \text{₦}24,000, making Cost of Goods Sold ₦96,000\text{₦}96,000. Since total goods available for sale is ₦18,000+₦92,000=₦110,000\text{₦}18,000 + \text{₦}92,000 = \text{₦}110,000, subtracting COGS gives an estimated closing stock of ₦14,000\text{₦}14,000.

Step-by-Step Solution

1
Convert mark-up on cost to gross profit margin on sales
Margin=Mark-up1+Mark-up=0.251+0.25=15=20%\text{Margin} = \frac{\text{Mark-up}}{1 + \text{Mark-up}} = \frac{0.25}{1 + 0.25} = \frac{1}{5} = 20\%
Sales figure is provided, so gross profit must be calculated as a percentage of sales (margin) rather than cost (mark-up).
2
Calculate Gross Profit and Cost of Goods Sold (COGS)
Gross Profit=20%×₦120,000=₦24,000\text{Gross Profit} = 20\% \times \text{₦}120,000 = \text{₦}24,000; COGS=₦120,000−₦24,000=₦96,000\text{COGS} = \text{₦}120,000 - \text{₦}24,000 = \text{₦}96,000
Subtracting gross profit from sales revenue yields the cost of goods sold.
3
Determine total goods available for sale
Goods Available for Sale=Opening Stock+Purchases=₦18,000+₦92,000=₦110,000\text{Goods Available for Sale} = \text{Opening Stock} + \text{Purchases} = \text{₦}18,000 + \text{₦}92,000 = \text{₦}110,000
Adding opening inventory to net purchases during the period gives total stock available for trading.
4
Calculate estimated closing stock
Closing Stock=Goods Available for Sale−COGS=₦110,000−₦96,000=₦14,000\text{Closing Stock} = \text{Goods Available for Sale} - \text{COGS} = \text{₦}110,000 - \text{₦}96,000 = \text{₦}14,000
Subtracting the cost of goods sold from total goods available leaves the remaining closing inventory.

Key Concept

Conversion of Mark-up to Margin in Stock Estimation
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Topics

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

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