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:
d. None of the above
Look for process work to understand why c. 20% is the correct answer.
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%
|Sales at 10% discount||Sales at 6% discount|
|Net Sale price||900||940|
|Profit of 20%||180||188|
Hope it is clear. Any doubt please comment!
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