Topanga Group began operations early in 2016. Inventory purchase information for
ID: 2462856 • Letter: T
Question
Topanga Group began operations early in 2016. Inventory purchase information for the quarter ended March 31, 2016, for Topanga’s only product is provided below. The unit costs include the cost of freight. The company uses a periodic inventory system.
Date of Purchase Units Unit Cost Total Cost
Jan. 7 3,000 $ 3.00 $ 9,000
Feb. 16 11,000 4.00 44,000
March 22 15,000 5.00 75,000
Totals 29,000 $ 128,000
Sales for the quarter, all at $8 per unit, totaled 17,000 units leaving 12,000 units on hand at the end of the quarter.
Required:
1.
Calculate Topanga's gross profit ratio for the first quarter using the following inventory methods.
A. FIFO
B. LIFO
C. Average Cost
2. Comment on the relative effect of each of the three inventory methods on the gross profit ratio.
Explanation / Answer
1
Calculation of Topanga's gross profit ratio for the first quarter:
Using FIFO Method (Periodic inventory system)
Cost of Goods sold:
Date of Purchase
Units
Unit Cost
Total cost
Jan. 7
3000
$ 3.00
$ 9,000.00
Feb. 6
11000
$ 4.00
$ 44,000.00
Mar. 22
3000
$ 5.00
$ 15,000.00
(17000-11000-3000)
Cost of Goods sold
17000
$ 68,000.00
Sales
17000
$ 8.00
$136,000.00
Gross Profit = Sales - Cost of Goods sold
$ 68,000.00
Gross Profit Ratio = Gross Profit / Sales
50.00%
2
Calculation of Topanga's gross profit ratio for the first quarter:
Using LIFO Method (Periodic inventory system)
Cost of Goods sold:
Date of Purchase
Units
Unit Cost
Total cost
Mar. 22
15000
$ 5.00
$ 75,000.00
Feb. 6
2000
$ 4.00
$ 8,000.00
(17000-15000)
Cost of Goods sold
17000
$ 83,000.00
Sales
17000
$ 8.00
$136,000.00
Gross Profit = Sales - Cost of Goods sold
$ 53,000.00
Gross Profit Ratio = Gross Profit / Sales
38.97%
3
Calculation of Topanga's gross profit ratio for the first quarter:
Using Average Method (Periodic inventory system)
Average cost per unit = 128000/29000 =
$ 4.41
Cost of Goods sold
17000
$ 4.41
$ 75,034.48
Sales
17000
$ 8.00
$136,000.00
Gross Profit = Sales - Cost of Goods sold
$ 60,965.52
Gross Profit Ratio = Gross Profit / Sales
44.83%
4
Relative effect of each of the three inventory methods on the gross profit ratio:
Method
Gross Profit %
Comment
FIFO
50.00%
Increased due to increase in price in sequence
LIFO
38.97%
Decreased due to Decrease in price in sequence
Average Method
44.83%
1
Calculation of Topanga's gross profit ratio for the first quarter:
Using FIFO Method (Periodic inventory system)
Cost of Goods sold:
Date of Purchase
Units
Unit Cost
Total cost
Jan. 7
3000
$ 3.00
$ 9,000.00
Feb. 6
11000
$ 4.00
$ 44,000.00
Mar. 22
3000
$ 5.00
$ 15,000.00
(17000-11000-3000)
Cost of Goods sold
17000
$ 68,000.00
Sales
17000
$ 8.00
$136,000.00
Gross Profit = Sales - Cost of Goods sold
$ 68,000.00
Gross Profit Ratio = Gross Profit / Sales
50.00%
2
Calculation of Topanga's gross profit ratio for the first quarter:
Using LIFO Method (Periodic inventory system)
Cost of Goods sold:
Date of Purchase
Units
Unit Cost
Total cost
Mar. 22
15000
$ 5.00
$ 75,000.00
Feb. 6
2000
$ 4.00
$ 8,000.00
(17000-15000)
Cost of Goods sold
17000
$ 83,000.00
Sales
17000
$ 8.00
$136,000.00
Gross Profit = Sales - Cost of Goods sold
$ 53,000.00
Gross Profit Ratio = Gross Profit / Sales
38.97%
3
Calculation of Topanga's gross profit ratio for the first quarter:
Using Average Method (Periodic inventory system)
Average cost per unit = 128000/29000 =
$ 4.41
Cost of Goods sold
17000
$ 4.41
$ 75,034.48
Sales
17000
$ 8.00
$136,000.00
Gross Profit = Sales - Cost of Goods sold
$ 60,965.52
Gross Profit Ratio = Gross Profit / Sales
44.83%
4
Relative effect of each of the three inventory methods on the gross profit ratio:
Method
Gross Profit %
Comment
FIFO
50.00%
Increased due to increase in price in sequence
LIFO
38.97%
Decreased due to Decrease in price in sequence
Average Method
44.83%
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