Profit-Loss, Interest and Mixtures problems

In this chapter we would be dealing with the 3 major application areas

of the Ratio and Percentage concepts. GMAT would often ask you about
these problems. Their frequency of appearance in the GMAT is in the
order given above. Well start with the most commonly asked
application
Profit-Loss:
Imagine yourself as a retail storeowner and you sell apparels. You buy
clothes lets say from China and you sell them in your retail store
which is in; lets say, Canada.
The price at which you buy clothes is called as the Cost Price (CP) and
the price at which you sell clothes is called as the Selling Price (SP). CP
is the total money spent on buying a product and includes shipping
and other expenses.
In an ideal situation, youd want the SP to be greater than the CP so
that you can make some Profit, which is the difference between the SP
and the CP.
Profit = SP CP
However, unfortunately, if you were not able to sell your products at a
price higher than the CP you would suffer a Loss, which is the
difference between the CP and the SP.
Loss = CP SP = - Profit
In other words, Loss is nothing but when you earn negative Profit.
So, if you bought a sweater worth $100 from China and sold it for
$110, then youd earn a profit of $10, which is $110 - $100. However, if
you sell it for $95 you make a loss of $5, which is $100 - $95.
In addition to absolute values, Profit and Loss can also be calculated in
terms of percentage. So,
Profit % =

Profit
100
CP

It can also be expressed as, Profit % =

SPCP
100
CP

SP
1) 100
CP

What the second formula does is it tells you that you dont necessarily
need the absolute values of SP and CP to find the Profit %, rather even
the SP to CP ratio would suffice as well. This fact is exploited in a lot of
DS question.
Similarly, Loss% =

Loss
100
CP

CPSP
100
CP

(1

SP
) 100
CP

= -

Profit %
These % can also be expressed with SP as the base (denominator)
instead of CP. Normally; the question would define whether the
percentage is to be calculated with CP as the base or with SP as the
base. However, if it is NOT mentioned, we advise you to consider CP as
the default base.
Now, you have imported your clothes from China and put them on
display at your shop. However, not a lot of customers turned up to buy
products at your store. So you follow a clever marketing strategy and
put your clothes on a Discount Sale. Lets say you put the clothes on a
40% flat discount sale.
What this means is that if you were earlier selling your products for
$100, now you will sell them for $100 40% of $100 = $100 - $40 =
$60
Remember, Discount is always applied to the Selling Price or the Tag
Price of the product.
So, Discount = Tag Price Actual Selling Price
So, in this case the Discount works out to be = $100 - $60 = $40
The Discount % = =

Discount
100
Tag Price

For Discount % the Tag Price (TP) is used as the denominator by

default.
Putting it all together:
Lets say there is a jeans manufacturer in China who sells you 1
standard pair of jeans for $5. You buy 100 such jeans and put them on
sale at your shop, with each pair of jeans sold for a profit of 70%. You
also spend $100 to pay for the shipping of the consignment of jeans
from China.

Now, you are able to sell 35 pieces of jeans at your shop, but you are
facing difficulties selling the other pieces. So, you put the remaining
pieces of jeans on a 50% discount sale.
As a result of this sale you are able to sell all but 2 pairs of the
remaining jeans that were defective. You therefore return these 2 pair
of jeans to the manufacturer in China and claim a full refund. The
Chinese manufacturer pays you the full refund for these 2 jeans,
however, he does not pay you the $5 shipping cost you incurred to ship
the products back to China, nor does he pay you the refund for the
initial shipping cost you incurred on importing these goods.
In this entire situation above, did you earn a net profit or a net loss?
Phew! Quite a situation we got here.. Lets solve it step by step
Step 1: Importing jeans from China
The cost of 1 pair of jeans = $5
And such 100 jeans cost you = $500
And you spend $100 on shipping
Therefore, your total Cost Price (CP) in purchasing the 100 jeans =
$600
CP of 1 pair of jeans = $600/100 = $6
Step 2: Selling 35 jeans
The CP of 35 jeans = 35 x $6 = $210
Initially, you sell 35 jeans at for a 70% profit. What does that mean for
the SP?
70% profit on 1 pair of jeans means the Selling Price (SP) per pair of
jeans = $6 + 70% of $6 = $6 + $4.2 = $10.2
So you sell those 35 jeans for a total of $10.2 x 35 = $357, and
Earn a total profit of $357 - $210 = $147 {Profit = SP CP}
So far, we are making a profit Now lets see what happens to the
other 65 jeans.
Step 3: Selling the remaining jeans for a discount

You are able to sell 100 35 2 {35 sold earlier and 2 returned due to
defects}, i.e. 63 jeans are sold at a 50% discount. Now, we need to find
whether we made a profit or a loss by selling these 63 jeans at a
discount.. To do that we need to find the CP and the SP for these 63
jeans.
CP of 63 jeans is = 63 x $6 = $378
Each pair of jeans is sold for a 50% discount. Remember that discounts
are applied to the Tag Price. We had initially put a tag price of $10.2 for
1 jeans. Therefore, we will now sell it for $10.2 50% of 10.2, i.e. a
50% reduction
{Notice that this is a successive % change problem. You first increase
$6 by 70% to get $10.2 and then you reduce it by 50% to get $5.1}
Therefore, SP of 1 discounted pair of jeans = $5.1, and
SP of 63 discounted jeans = $5.1 x 63 = $321.3
Since, the CP of 63 jeans is more than their SP, we made a loss by
selling these jeans at a 50% discount. Probably 40% discount would
have been better.
Anyway, the total loss incurred on selling discounted jeans is = $378 $321.3 = $56.7
Step 4: Returning the defective jeans
We return 2 defective jeans for a full refund. Initially, we had bought 2
jeans for 2 x $5 = $10 from the manufacturer.
Take care that the manufacturer will not give us the refund of the
original shipping cost.
So we gain $10 from this return that is essentially a no-profit, no-loss
situation for us. Because we bought these jeans for $10 and now we
returned them for $10.
Instead we lose $5 on the shipping costs incurred while returning the
goods. Bad decision to return the jeans!
So, in this case we end up losing $5.
Now, we can add all the profits and losses from the individual cases.
We get = $147 - $56.7 - $5 = $85.3

Cool, so you end up with a profit.. Nice job!!

Interest Problems:
Interest problems usually relate to investments or to loans. There are 2
types of interest:
1) Simple Interest (SI):
Simple interest is just that.. simple.. You have a certain rate of
interest and you pay the interest periodically based on it. No
fancy calculation, no hanky-panky
Lets define the basic terms here The money you take as loan
originally is called as the Principal, the interest charged is
expressed in terms of % and is called as the Rate of Interest, and
the Amount at the end of the fixed timed period is the sum of
Principal and the Total Interest calculated over that Time Period.
So, lets say you took a loan of $50,000 from a friend (in real life,
a bank would never offer a loan on simple interest) at the
condition that youll pay him 10% interest every year for 5 years.
So, $50,000 is the Principal
The rate of interest is 10% per annum or p.a. (per annum means
per year)
The time period is 5 years
So, effectively, youd be paying 10% interest on $50,000 every
year.
10% of $50,000 = $5,000
So, youd be paying $5,000 interest every year.
For 5 years, youd pay $5,000 x 5 = $25,000 as the total interest.
The Total Interest is $25,000
The Total Amount owed is = $50,000 + $25,000, i.e. the original
money you owe + the interest owed
The Total Amount owed = $75,000
If we were to change the time period to say 6 months and apply
the same rate of interest, well have

Interest cost for the full year, i.e. 12 months = 10% of $50,000 =
$5,000
Interest cost for 1 month = $5,000/ 12
Interest cost for 6 months = [$5,000/12] x 6 = $5,000/2 =
$2,500
2) Compound Interest (CI):
CI is a bit tricky because here the interest is calculated not only
on the principal amount that you originally took loans on, but the
interest is also calculated for the interest that you have accrued
so far. Therefore, in CI the interest is charged on the total amount
owed so far.
Lets see this in detail. Lets say you took a loan of $50,000 at
10% per annum for 3 years.
Now, for the first year the Interest would be 10% of $50,000 =
$5,000 Lets tag this info as ---- (1)
Now for the 2nd year the interest would be calculated not only on
the principal amount of $5,000, but also on this extra $5,000
interest.
So, the interest for the 2nd year would be 10% of ($50,000 +
$5,000) = 10% of $55,000 = $5,500 Lets tag this info as ---(2)
For the 3rd year, the interest would be calculate on the principal
of $50,000 + on the interest accrued so far, viz. $5,000 + $5,500
from the 1st and 2nd years, respectively.
So, the interest for the 3 rd year would be 10% of ($50,000 +
$5,000 + $5,500) = 10% of ($60,500) = $6,050 Lets tag this
info as ---- (3)
Now, total compound interest accrued = $5,000 + $5,500 +
$6,050 {from (1), (2) and (3)}
= $16,550
Contrast this with the scenario if you would have taken a loan of
$50,000 at 10% for 3 years with simple interest instead of
compound interest.

The total SI for 3 years would have been = 10% of $50,000 x 3 =

$5,000 x 3 = $15,000
Notice that CI > SI always.
For the 1st year the CI = SI, from then onwards CI > SI.
The general formula to calculate the compounded amount you
owe is as under:
R
n
100
Where P is the Principal, R is the rate of interest (in terms of %
p.a.) and n is the number of time intervals (in years). A is the
total amount, i.e. it is P + CI, so the formula can be rewritten as:
A = P (1 +

R
n
100
If the interest is compounded quarterly then R would become R/4
and n would become n 4, i.e. the rate would get divided by 4
and number of time intervals would become n x 4.
P + CI = P (1 +

This makes sense, as the rate of interest is expressed in terms of

per annum, i.e. for the full year. Since a year has 4 quarters (of 3
months each) the rate of interest for the full year should get
divided by 4.
Similarly, the number of time intervals is normally expressed in
terms of years. However, if we are compounding quarterly the
number of years would get multiplied by 4 because each year
has 4 quarters.
The idea is to express the rate of interest and number of time
intervals for the same period as the compounding of interest.
If you are compounding (i.e. calculating) the interest on a half
yearly basis, the rate of interest R would become R/2 and the
number of time intervals would become n x 2.
Mixtures:
There are 2 concepts to be studied under mixtures. The first one is
dealing with the mixture of the cheaper and expensive (dearer)
varieties.

Lets say we are mixing 2 varieties of cereal to make a new cereal. The
1st one costs $10 and the 2nd one costs $20. Lets say we want the
mixture of these 2 cereals to cost $14. Now the problem is how do we
mix these 2 mixtures to get the resulting mixture costing $14. What
should be the ratio in which they should be mixed?
A lot of other people or books may give a more theoretical solution, but
the solution can easily be found using the method of alligations. It
works like this

The required ratio would be

Dearer Average
AverageCheaper

2014
1410

6
4

3
2
This technique is applicable to not only mixing two differently priced
products, but it is also true for mixing two different concentration
solutions as well. Lets say you want to mix 2 drinks one strong drink
that contains 24% alcohol and one mild drink that contains 6% alcohol
to get a drink that contains 14% alcohol, youd still use alligations.
The other problem in mixtures is that of dilution.
Lets say you have 10 gallons milk. You take out 1 gallon milk and
replace it with 1 gallon water. You then again take out 1 gallon of the
milk-water solution and replace it with 1 gallon water. How much milk
is left in the solution now?
Lets break this step by step.
Step 1: There are 10 gallons of milk, you take out 1 gallon and replace
it with 1 gallon water.
So, now Milk = 9 gallons and Water = 1 gallon

Step 2: You take out 1 gallon of the mixture (solution) and replace it
with 1 gallon of water. Now, take care of the fact that you dont take
out 1 gallon of milk, instead you take out 1 gallon of the mixture that
contains Milk and Water in 9:1 ratio.
So every gallon of the mixture would contain 0.9 gallon of milk and 0.1
gallon of water. By taking out 1 gallon of the mixture you have taken
out 0.9 gallon of milk and replaced it with water.
So now milk = 9 0.9 = 8.1 gallons in the mixture