Topanga Group began operations early in 2013. Inventory purchase information for

Question

Topanga Group began operations early in 2013. Inventory purchase information for the quarter ended March 31, 2013, for Topanga’s only product is provided below. The unit costs include the cost of freight. The company uses a periodic inventory system.

     Sales for the quarter, all at $8 per unit, totaled 37,000 units leaving 24,000 units on hand at the end of the quarter.

Calculate the Topanga's gross profit ratio for the first quarter using the following inventory methods:(Round your intermediate calculations to 4 decimal places for average cost method.)

      
      

     

Topanga Group began operations early in 2013. Inventory purchase information for the quarter ended March 31, 2013, for Topanga’s only product is provided below. The unit costs include the cost of freight. The company uses a periodic inventory system.

Explanation / Answer

Answer:1

Gross profit ratio = Gross profit/ Total Sales

a) FIFO method-

Cost of goods sold (FIFO method)

Gross profit (FIFO method)

Gross profit ratio = 147000 /296000 = 49.66% or 50% (rounded up)

b) LIFO method -

Gross profit ratio = 118000 / 296000 = 39.86% or 40% (rounded up)

c) Average- cost method-

Weighted average unit cost = Cost of goods available for sale/ Units for sale

Weighted average unit cost =$269000/ 61000 units = $4.4098 per unit

Gross profit

Gross profit ratio = 132835/296000 = 44.87 % or 45%

Answer:2

Effect of LIFO on the Gross profit ratio:

LIFO leads to lower cost of ending inventory and therefore, higher cost of goods sold which resulted into lower gross profit. Due to this reason GPR is lower with LIFO method.

Effect of FIFO on the Gross profit ratio:

FIFO leads to higher cost of ending inventory and therefore, lower cost of goods sold which resulted into higher gross profit. Due to this reason, GPR is higher with FIFO method.

Cost of goods available for sale for periodic system: Purchases Units Unit cost Total cost = Units * unit cost Jan-07 5000 $       3.00 $                                    15,000.00 Feb-16 26000 $       4.00 $                                1,04,000.00 Mar-22 30000 $       5.00 $                                1,50,000.00 Cost of goods available 61000 $                                2,69,000.00

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