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Difficulty: HardAccounting for Dependent Branches at Selling / Invoice Price

A head office forwards merchandise to its dependent branch at an invoice price loaded at a mark-up of 3313%33\frac{1}{3}\% on cost. The branch ledger records show the following inventory transactions at invoice price for the trading period:

- Opening inventory: ₦15,000\text{₦}15,000
- Goods received from head office: ₦120,000\text{₦}120,000
- Goods returned to head office: ₦12,000\text{₦}12,000
- Closing inventory: ₦18,000\text{₦}18,000

Assuming all remaining goods were sold at the designated invoice price, what is the gross profit realized by the branch during the period?

  1. ₦26,250\text{₦}26,250Answer
  2. B
    ₦35,000\text{₦}35,000
  3. C
    ₦30,000\text{₦}30,000
  4. D
    ₦4,500\text{₦}4,500

Answer

The gross profit realized by the branch during the period is ₦26,250\text{₦}26,250.
The correct answer is ₦26,250\text{₦}26,250. A mark-up of 3313%33\frac{1}{3}\% (or 13\frac{1}{3}) on cost is equivalent to a profit margin of 25%25\% (or 14\frac{1}{4}) on invoice price. Net goods available for sale at invoice price equal opening inventory (₦15,000\text{₦}15,000) plus goods received (₦120,000\text{₦}120,000) minus returns (₦12,000\text{₦}12,000), totaling ₦123,000\text{₦}123,000. Subtracting closing inventory (₦18,000\text{₦}18,000) gives ₦105,000\text{₦}105,000 as the invoice price of goods sold. Multiplying ₦105,000\text{₦}105,000 by the 25%25\% margin yields a realized gross profit of ₦26,250\text{₦}26,250.

Step-by-Step Solution

1
Convert mark-up on cost to profit margin on invoice price
Margin = Mark-up1+Mark-up=1/31+1/3=14=25%\frac{\text{Mark-up}}{1 + \text{Mark-up}} = \frac{1/3}{1 + 1/3} = \frac{1}{4} = 25\%
Because branch values are given at invoice price, profit loading must be computed using margin on invoice price.
2
Calculate net invoice price of goods available for sale
Opening Inventory + Goods Received - Goods Returned = ₦15,000+₦120,000−₦12,000=₦123,000\text{₦}15,000 + \text{₦}120,000 - \text{₦}12,000 = \text{₦}123,000
Determines total goods held by the branch before deducting unsold closing stock.
3
Determine invoice price of goods sold
Goods Available - Closing Inventory = ₦123,000−₦18,000=₦105,000\text{₦}123,000 - \text{₦}18,000 = \text{₦}105,000
Calculates the total sales value (at invoice price) of merchandise sold to customers.
4
Compute realized gross profit
Gross Profit = 25%×₦105,000=₦26,25025\% \times \text{₦}105,000 = \text{₦}26,250
Applying the margin to the invoice value of goods sold yields the profit element realized by the branch.

Key Concept

Conversion of Mark-up on Cost to Margin on Invoice Price for Dependent Branch Profit Realization
Estimated Time:2m 0s
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Topics

Accounting for Dependent Branches at Selling / Invoice Price

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