Markup on cost determines purchases as cost of sales

Steps:

• Markup of 25% on cost means selling price = cost × 1.25.
• Cost of goods sold (purchases) = revenue ÷ 1.25.
• $120,000 ÷ 1.25 =$96,000.
• Inventory figures confirm net usage but align with this cost total.

Why D is correct:

• Formula for cost from markup: purchases = sales / (1 + 0.25) = $120,000 / 1.25 =$96,000, representing total goods acquired at cost.

Why the others are wrong:

• A: Results from misapplying a different profit percentage, like 25.5% margin.
• B: Assumes 25% gross margin on sales, yielding COGS = 75% × $120,000 =$90,000.
• C: Arises from approximate or erroneous division of $120,000 by 1.25.

Final answer: D