Your store buys ice cream at a cost of $1.50 a half gallon and sells it for $4 a half gallon.General and administrative expenses are $0.75 per half gallon.Which of the following statements is true?

Question

Quizplus · Accepted Answer

To determine gross profit per half gallon, subtract the cost of goods sold (COGS) from the selling price. 
COGS = cost of ice cream + general and administrative expenses
COGS = $1.50 + $0.75 = $2.25
Selling price - COGS = gross profit per half gallon
$4 - $2.25 = $1.75
Therefore, the gross profit per half gallon is $1.75, which is represented by choice B. However, the statement in choice A is also true in that the gross profit per half gallon is $2.50 when considering the markup percentage: 
Markup percentage = (selling price - COGS) / COGS
Markup percentage = ($4 - $2.25) / $2.25 = 0.7778 = 77.78%
This means that the selling price is 77.78% higher than the COGS. Therefore, the gross profit as a percentage of the selling price is:
Gross profit percentage = gross profit / selling price
Gross profit percentage = $1.75 / $4 = 0.4375 = 43.75%
The gross profit per half gallon as a dollar amount is $2.50, which is equal to the COGS multiplied by the markup percentage:
Gross profit per half gallon = COGS x markup percentage
Gross profit per half gallon = $2.25 x 0.7778 = $1.75
Therefore, the statement in choice A is also true.

Your Store Buys Ice Cream at a Cost of $1