Need Help for This Question

[Meenakshi]

A trader who fixes her prices by adding 50% to cost actually achieved a mark-up of 45%.
Which of the following factors could account for the shortfall?

1 Sales were lower than expected.
2 The opening inventories had been overstated.
3 The closing inventories of the business were higher than the opening inventories.
4 Goods taken from inventories by the proprietor were recorded by debiting drawings and crediting purchases with the cost of the goods.

A All four factors
B 1, 2 and 4 only
C 2 only
D 3 and 4 only

[Poonam]

Hi,
I feel option A- All four factors are correct option as all the option given above affects the mark up:
1.) If the sales are lower than the expected sales then the profits are lower as you are selling for example 8000 units where the capacity for production is 10000 units. So, profit is also decreasing proportionately.
2.) If the opening inventory is overstated then the cost of production increases and if the profit margin remains the same then the profits will decrease.
3.) Similarly to the 3rd option.
4.) As given the goods are taken by the proprietor on cost price so it does not gain any profits for the organisation .Thus the mark up may decreased.

Regards
Poonam.

[Meenakshi]

Helo Poonam,
Thanks for replying, well actually i also think that the correct answer should be A, but the answer is C. This question is frm past exam paper and im confuse with this answer, how can it be C?!

[Poonam]

Hi,
Please give me the year of the exam paper so that I could help you as fast as possible with the answer to your question.

Thanks
Poonam

[Acid]

Looks like the question is taken from some textbook rather then past exam paper...

My calculation is also in support of Poonams answer.

[Meenakshi]

Helo,its frm the old syllabus paper 1.1 June 2005 number 15. This question is not taken frm textbook.

[Grace]

As far as first reason is concerned, i think, seeling less than expected should not affect the mark up. This is because whatever she sols, sold at 50% mark up. This means that instead of selling goods worth $8000 if she sold goods worth $6000 only, her sells are recorded at $12,000 instead of $16,000 keeping the mark up same. Therefore A and B can not be correct options which includes 1 as a reason for decreasing mark up.

about the overstatememt of opening inventory, it may affect the mark-up. This is because, the price might have set considering the original cost and as a result of overstatement the cost increases and therefore the margin.

when closing inventory is higher than opening inventory this will not affect mark-up since price will depend on actual cost.


forth reason, where sale to proprietor which is considered as purchases wrongly and credited purchases i.e. reduced purchases therefore it will not affect the mark-up. Therefore the correct option should be C i.e. reason 2 only.

[Nancy]

Helo Poonam,
Thanks for replying, well actually i also think that the correct answer should be A, but the answer is C. This question is frm past exam paper and im confuse with this answer, how can it be C?!

Answer – C
The trader may have overstated the opening inventory, making the actual markup lower than the standard mark up of 50%.

According to me the above answer given by ACCA is correct if we reason out as follows.

Option 1 is wrong since the increase or decrease in the physical units will not affect the mark-up percentage. This is because we will sell the units at a fixed price which contains the mark-up.

Option 3 will be wrong since in the given case the mark-up has reduced and closing inventory higher than the opening inventories will lead to an increase in the mark-up percentage.

Option 4 will again not affect the mark-up since the purchases account has been credited (which means purchases have been reduced) at cost and this will not affect the mark-up at all. Equivalent units will be reduced from the inventory ledger.