What Affects the Gross Profit Rate Assuming Sales Are Constant?
With constant sales, a business receives the same amount of revenue from its customers in any scenario. The number of items the business sells, and the price of these items, does not change. Because the gross profit rate is the percentage of profit that the business earns from these sales, any change that affects the cost to produce a product will affect the gross profit rate.
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Returns and Allowances
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Gross profit includes returns and allowances. Some customers who are not satisfied will return their products for a refund. Returns and allowances are adjustments made after the business calculates its total sales, so they do not change the total sales receipts that the business reports, according to the Internal Revenue Service. A return is a full refund of the product bill. An allowance is an additional after-sale discount the merchant offers so the buyer does not demand a return.
Discounts
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Some sale terms include discount arrangements. The company may allow a customer to receive an additional discount for paying the bill promptly. When the company records the full invoice price as part of its total sales, it includes an adjustment if the buyer claims the discount for paying the bill early. Because this is an adjusting entry, it reduces gross profit but does not affect the value of total sales.
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Incoming Transportation
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Transportation costs are part of the cost of goods sold when they are expenses that the business pays before it receives raw materials. If the truck that delivers materials has to pay higher diesel prices or driver salaries increase, this will increase the cost of goods sold. Outgoing transportation costs do not affect cost of goods sold since the company does not need to pay them to make items in its factory. So, outgoing transportation costs do not affect the gross profit rate.
Production Resources
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The cost of production inputs affects the cost of goods sold, which affects the gross profit rate. If the company sells the same number of products, but its natural gas and electricity bills increase, it will earn less profit on each sale. If the company has to pay production workers more money because it is difficult to find skilled workers, this will also raise the cost of goods sold, reducing the gross profit rate.
Inventory
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Inventory losses affect the gross profit rate. If a flood or fire damages inventory the company already produced, the company must apply its production costs to a smaller number of items, increasing the cost of goods sold per item and reducing the gross profit rate. Theft has the same effect. If a sole proprietor uses inventory for personal benefit, this also reduces the gross profit per item.
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