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making estimation a more convenient approach. Two different methods can be used for
estimating the value of inventory including, gross profit or retail method, these methods
are considered in the following sections.

Gross profit method
The gross profit method uses the gross profit rate to calculate the amount of gross profit
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and cost of sales. In this method, the estimated inventory cost at the end of the period is
determined by subtracting the cost of sales from the total cost of goods available for sale.
To employ this method, one needs to know the sales revenue, cost of goods available
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for sale, and gross profit rate. This method operates under the assumption that all sales
are made at a constant gross profit rate. The method also uses two different ratios, the
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mark-up and the margin. Each employs a different formula, as will be illustrated in the
following parts.

Mark-up formula: This is the percentage of gross profit on cost of sales.

Gr ss pr fitq q
Mark - up= # 100
C st f salesq q
Alternative formula for mark – up can also be used, which is presented as follows;
Gr ss pr fit
q
q
Mark - up= # 100
Sales - Gross profit
Margin: The percentage of gross profit on sales is determined by the following formula:
q
Gr ss pr fit
q
M argin= # 100
Sales
Alternative formular for the margin is presented as follows:
Gross profit
M arg in = # 100
Cost of sales+ Gross profit
However, it is important to note that the mark-up can be converted into a margin, or
conversely, the margin can be transformed into a mark-up using the appropriate formulas:

Mark - up
M argin= # 100
Mark - up+ 100

M argin
Mark - up = # 100
100 - M argin
Example 2.10
Mwembeni Shoe Traders specializes in selling ladies’ shoes with a mark-up of 25%.
Recently, a customer purchased a pair of shoes for TZS 40,000. The traders are now
interested in determining the profit percentage they made from this sale.

Student’s Book Form Five
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