View Full Version : GRE Prep Question - Profit Calculation

buckykatt

08-06-2007, 06:04 PM

I'm working through Kaplan's GRE Exam Math Workbook (Fifth Edition) and came across the problem (on p.150):

What is the percent profit an ice cream seller makes on vanilla ice cream if vanilla ice cream costs him 90 cents per scoop to make and he sells it at $1.20 per scoop?

To calculate profit as a percent, I would divide gross profit by total revenue, i.e. $0.30/$1.20 = 25%. However, Kaplan's answer is 33 1/3%, i.e. gross profit divided by cost of goods sold.

So, my questions are, first, isn't mine the accepted way to calculate profit? and, second, even if I'm right, is Kaplan right about how we're expected to answer on the GRE?

Thesus

08-06-2007, 06:10 PM

I would agree with Kaplan. To me, that's how it would be done. So, to me, it's clear which way one responds on the GRE.

buckykatt

08-06-2007, 06:17 PM

BTW, while researching this, I found this free math review from ETS (http://www.ets.org/Media/Tests/GRE/pdf/GREmathPractice.pdf), though unfortunately it doesn't have an example problem involving profit as a percent.

whxyj

08-06-2007, 06:44 PM

it seems strange to me either, i think profit/rev=profit% is right.

btw, the actual gre math doesn't have lots of stuff on biz world.

veroniquaz

08-06-2007, 06:49 PM

I would also divide profit/revenue.

TruDog

08-06-2007, 08:58 PM

In accounting terms, Kaplan is correct. The question is whether this should be defined as return on investment (33 1/3%) or profit margin (25%).

KingOfConvenience

08-06-2007, 09:14 PM

You want to be an economist? Remember that profit is the same as markup, which mean your percent profit is your percent markup which is 33 1/3 %

buckykatt

08-06-2007, 09:20 PM

I found a sample question on the ETS web site (from the new fill-in-the-blank types that are coming online in November) that mentions profit as a percent. See

http://www.ets.org/Media/Tests/GRE/pdf/6398_quantitative_qs.pdf

In question #2 they explicitly ask for the profit "expressed as a percent of the merchant's cost".

If they always ask explicitly like this, then of course it's not going to be a problem to know which way to calculate it. Here's hoping. ;)

buckykatt

08-06-2007, 09:27 PM

You want to be an economist? Remember that profit is the same as markup, which mean your percent profit is your percent markup which is 33 1/3 %

The question isn't how to define profit--there's no dispute that it's revenue minus cost. The question is about what to use as the base when calculating profit as a percent--the cost or the total revenue.

KingOfConvenience

08-06-2007, 09:43 PM

sorry for the useless post! i didn't realize i hadn't typed all i thought!

i think the confusion arises from the conflation of percent profit and profit margin. TruDog had the correct explanation. The business world uses profit margins because cost figures are not usually published, but revenues are. This makes it easier to calculate what the actual profit amounts are. Percent profit, however, is a more useful figure because it allows one to assess the rate of return, the "leverage" in some sense of the money used to buy the sold good.

Suppose we denote profit with P, revenue with R, and cost with C. Then P = R - C. Call profit margin 'x' and percent profit 'y'. Then, x = P / R, and y = P / C. Notice that x is bounded about by 1 (i.e. 100 %), if we make the reasonable assumption that C >= 0. Also, notice that y = P / C = xR / (R - xR) = x / (1 - x). Importantly, let's say a firm has a 50% profit margin. This implies that the percent profit is 100%! But this is not an unusual gross profit margin (gross implies operating expenses are not included in cost C). But, as a markup that is huge. My suspicious self is inclined to believe profit margins are a less shocking figure for the general public to hear of. People would be even more enraged with profiteering corporations if the really knew how small a fraction of sales price the cost of producing a particular physical product is.

bscout

08-07-2007, 02:23 AM

The profit should be calculated taking into account the cost, not the revenue.