Question

Assertion (A): If Gross Profit Ratio is 20%, goods for ₹ 50,000 sold to employees at cost will decrease the ratio.

Reason (R): There will be no change in Gross Profit Ratio, because both Cost of Revenue from Operations and Revenue from Operations will increase by the same amount.

In the context of the above two statements, which of the following is correct?

Options

• (A) and (R) both are correct and (R) correctly explains (A).

• Both (A) and (R) are correct but (R) does not explain (A).

• Both (A) and (R) are incorrect.

• (A) is correct but (R) is incorrect.

Answer 1

(A) is correct but (R) is incorrect.

Explanation:

When goods are sold to employees at cost, no gross profit is generated, resulting in a lower total gross profit ratio. Hence, the assertion is correct. However, Reason is incorrect because, even if sales and costs increase equally, gross profit does not increase in the usual 20% proportion, hence the ratio will not remain constant.