Question

Calculate the relevant profitability ratios with the following information: 

Opening Stock: Rs. 30,000 

Stock at the end of year : Rs.20,000 

Annual Sales: Rs. 50,000 

Annual Purchases: Rs.10,000 

Total expenses: Rs.5,000 

Capital at start: Rs. 62,000 

Closing Capital: Rs. 18,000

Answer 1

(1) Gross profit ratio= (Gross profit / Net sales) x 100 % 

= (30,000 / 50,000) x 100% 

= 60% 

(2) Net profit ratio = (Net profit / Net sales) x 100 % 

= (25,000 / 50,000) x 100% 

= 50%

(3) Return on capital employed = (Profit before interest / Capital employed) x 100 % 

= (25,000 / 40,000) x 100% 

= 62.5%

Working Notes: 

Gross profit = Sales - Cost of goods sold 

= 50,000 - 20,000 

= Rs. 30,000

Cost of goods sold = Opening Stock + Purchases –Closing Stock 

= 30,000 + 10,000 - 20,000 

= Rs. 20,000

Net profit = Gross profit - Total expenses 

= 30,000 - 5,000 

= Rs. 25,000

Average capital employed = (Opening Capital + Closing Capital) /2 

= (62,000 + 18,000) /2 

= Rs. 40,000