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Calculate the contribution to sales ratio given the sales and profit data for two consecutive years.

Accounting

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Step-by-step solution

4 steps

  1. Identify the relevant data for Sales and Profit for both years.

    • Year 2003:
      • Sales = N225,000
      • Profit = N20,000
    • Year 2004:
      • Sales = N285,000
      • Profit = N35,000

  2. Calculate the change in Sales.

    Change in Sales=Sales (2004)−Sales (2003)\text{Change in Sales} = \text{Sales (2004)} - \text{Sales (2003)} Change in Sales=N285,000−N225,000=N60,000\text{Change in Sales} = \text{N}285,000 - \text{N}225,000 = \text{N}60,000

  3. Calculate the change in Profit.

    Change in Profit=Profit (2004)−Profit (2003)\text{Change in Profit} = \text{Profit (2004)} - \text{Profit (2003)} Change in Profit=N35,000−N20,000=N15,000\text{Change in Profit} = \text{N}35,000 - \text{N}20,000 = \text{N}15,000

  4. Calculate the Contribution to Sales Ratio.

    The contribution to sales ratio (or P/V ratio) can be calculated as the change in profit divided by the change in sales, because fixed costs remain constant.

    Contribution to Sales Ratio=Change in ProfitChange in Sales\text{Contribution to Sales Ratio} = \frac{\text{Change in Profit}}{\text{Change in Sales}} Contribution to Sales Ratio=N15,000N60,000\text{Contribution to Sales Ratio} = \frac{\text{N}15,000}{\text{N}60,000} Contribution to Sales Ratio=0.25\text{Contribution to Sales Ratio} = 0.25

    Expressed as a percentage:

    Contribution to Sales Ratio=0.25×100%=25%\text{Contribution to Sales Ratio} = 0.25 \times 100\% = 25\%

    The contribution to sales ratio is 0.25 or 25%\boxed{\textbf{0.25 or 25\%}}.

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