There are many producers, now-a-days, who have their own retail shop (Branch). It deals in both retail and wholesale transactions. The profit rates earned by Branches differ between the retail sale and wholesale. Here, it is necessary to account the additional profit made by a Branch through retail trading over the wholesale trading. Wholesale price is always less than retail price.
For instance, the cost of a product is Rs 100, the wholesale price is Rs 140 and the retail price is Rs 160. If the Branch sells the product, the profit will be Rs 60; but the real profit earned by the Branch is Rs 20 (Rs 160 – 140), which is the contribution of Branch. The profit of Rs 40 (Rs 140 – Rs 100) would have been made by the Head Office by selling on wholesale basis to others.
Under this situation, to find out the real profit earned by a Branch, the Head Office charges the Branch with wholesale price. This facilitates the Head Office to know the retail profit earned by a Branch. In other words, the difference between the wholesale price and selling price is the pure profit on retailing.
The Head Office sends the goods to Branch at wholesale price and in case all the goods have been sold, there is no problem. If not, the unsold goods lying with the Branch will be at invoice price and in such case adjustment for the unrealized profit of the Head Office Trading Account must be made through Branch Stock Reserve Account in order to find out true profit of the concern as a whole.
Ascertain the profit that you consider as having been earned by the Delhi Branch of Jaipur Industries Ltd. from the following: