Using the gross profit method, if Net Sales are 500 and the gross margin is 40%, what is the estimated COGS?

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Multiple Choice

Using the gross profit method, if Net Sales are 500 and the gross margin is 40%, what is the estimated COGS?

Explanation:
Gross profit method uses the gross margin percentage to form Gross Profit from net sales, and then subtracts that amount from net sales to estimate COGS. A 40% gross margin means Gross Profit is 40% of net sales. With net sales of 500, Gross Profit = 0.40 × 500 = 200. COGS = Net Sales − Gross Profit = 500 − 200 = 300. Another way to see it: COGS = Net Sales × (1 − 0.40) = 500 × 0.60 = 300. So the estimated COGS is 300.

Gross profit method uses the gross margin percentage to form Gross Profit from net sales, and then subtracts that amount from net sales to estimate COGS. A 40% gross margin means Gross Profit is 40% of net sales. With net sales of 500, Gross Profit = 0.40 × 500 = 200. COGS = Net Sales − Gross Profit = 500 − 200 = 300. Another way to see it: COGS = Net Sales × (1 − 0.40) = 500 × 0.60 = 300. So the estimated COGS is 300.

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