Cast Iron Grills, Inc., manufactures premium gas barbecue grills. The company us

Question

Cast Iron Grills, Inc., manufactures premium gas barbecue grills. The company uses a periodic inventory system and the LIFO cost method for its grill inventory. Cast Iron's December 31, 2018, fiscal year-end inventory consisted of the following (listed in chronological order of acquisition):

Units Unit Cost

8,000 $800

5,500 900

9,000 1,000

The replacement cost of the grills throughout 2019 was $1,100. Cast Iron sold 42,000 grills during 2019. The company's selling price is set at 200% of the current replacement cost.

Required:
1. & 2. Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2019 under two different assumptions. First, that Cast Iron purchased 43,000 units and, second, that Cast Iron purchased 22,500 units during the year.
4. Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2019 assuming that Cast Iron purchased 43,000 units (as per the first assumption) and 22,500 units (as per the second assumption) during the year and uses the FIFO inventory cost method rather than the LIFO method.

Explanation / Answer

1 & 2). LIFO Method and Purchases are 43000 units:
Selling Price = 1100*200% = 2200
Sales = 2200*42000 = 92,400,000
Cost of goods sold = 42000 * 1100 = 46,200,000
Gross Profit = 92,400,000-46,200,000 = 46,200,000
GP % = 46200000 / 92400000 = 50%

LIFO and Purchases are 22500 units:
Then sales units include 22500 units at $1100, 9000 units at $1000, 5500 units at $900 and 5000 units at $800.
Cost of goods sold = (22500*1100)+ (9000*1000)+(5500*900)+(5000*800) = 42,700,000
Gross profit = 92,400,000 - 42,700,000 = 49,700,000
GP % = 49700000 / 92400000 = 53.78%

4). FIFO and purchases are 43000 units :
Sales = 2200*42000 = 92,400,000
Cost of good sold = (8000*800)+(5500*900)+(9000*1000)+(19500*1100) = 41,800,000
Gross Profit = 92,400,000 - 41,80,000 = 50,600,000
Gross Profit % = 50600000/ 92400000 = 54.76%

FIFO and Purchases are 22500 units:
Here Cost of goods sold remains same, there will be no change due to First in First out method.
Hence Gross profit also remains same = 50,600,000
G.P % = 54.76%

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