8. One of ADNOC's businesses has a net income to revenue ratio of 25%.
a) This ratio an expression of the
(1 mark)
b) Use the ratio above to calculate the product cost (2 Marks)
HUAWEI

a) This ratio is an expression of the Net Income over the Revenue.  It shows that for every revenue generated, there is a net income of 25%.  Every dollar in revenue gives ADNOC a net income of $0.25.

b) Using the ratio above to calculate the product cost:

It is not possible to use net income to revenue ratio to calculate the product cost.  The product cost is made of costs of materials, labor, and factory expenses.  These costs are directly identifiable to the product.

Unless we assume here that product cost is equal to the total cost.

Using the above assumption, the product cost will be 75% (100 - 25)%.  This means, for every dollar in revenue, the all-inclusive product cost will be equal to $0.75.

Explanation:

a) Net Income is the result obtained after deducting all expenses, including product cost and the cost of doing business.  The net income is also called the profit margin ratio.

Net Income Ratio is calculated by dividing the net income by the net sales.  Net sales is calculated by subtracting any returns or refunds from gross sales. Net income equals total revenues minus total expenses and is usually the last number reported on the income statement

b) In costing, the product cost can be derived in many ways.  There are product costs based on marginal costing, absorption costing, and total costing.  The most relevant is the cost based on marginal costing.

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