Question

The profit margin (net income to sales ratio) at New Company is 20%. New Company gave a customer a discount of 10%. However, if the discount had only been 6% the

customer would still have made the same quantity of purchases. The effect of the unnecessary discount was to reduce New Company income by:

a. 4%

b. 6%

c. 20%.*

d. None of the above

Look for process work to understand why c. 20% is the correct answer.

Answer 1

Assume the customer would have purchased goods worth $1000 irrespective of a discount of 10% or 6%

The lost profit percentage = (Lost profit )/ Lost sales

=( Profit at 6% discount - Profit at 10% discount) / ( Sales at 6% discount - Sales at 10% discount)

= ( 188 -180) / ( 940 -900)

= 8/ 40

= 0.2 or 20%

Workings:

	Sales at 10% discount	Sales at 6% discount
Sales	1000	1000
Less: Discount	100	60
Net Sale price	900	940
Profit of 20%	180	188
Lost profit		8

Hope it is clear. Any doubt please comment!