Vinnie\'s House of Televisions has 75 identical 27-inch color monitors in stock
ID: 2536765 • Letter: V
Question
Vinnie's House of Televisions has 75 identical 27-inch color monitors in stock on January 1, 2018. Vinnie maintains records of the serial number of each monitor to track its costs. Vinnie purchased the 75 monitors on December 5, 2017, for $450 each. He also purchased 50 on January 2, 2018, for $500 each and an ad ditional 65 on January 15, 2018, for $600 each. Each monitor is priced to sell at $1,000. Vinnie sold 130 monitors during the month of January a. Compute gross profit and ending inventory for the month if the company adheres to each of the following: (1) FIFO cost flow assumption (2) Average cost flow assumption (3) LIFO cost flow assumption b. Assume that Vinnie uses the specific identification method to compute the cost of goods sold. Explain how Vinnie could manipulate the gross profit number. What are the highest and the lowest gross profit amounts Vinnie could report? What are some possible factors that could motivate Vinnie to report either the highest or the lowest net income amount?Explanation / Answer
a. 1) FIFO cost flow assumption
Sales = 130 x 1,000 = 130,000
Cost of Goods Sold = (75 x 450) + (50 x 500) + (5 x 600) = 61,750
Gross profit = 130,000 - 61,750 = 68,250
Ending inventory = 60 x 600 = 36,000
2) Average cost flow assumption
Sales = 130,000
Average cost = Total cost/total number of units = 97,750/190 = 514.47
Cost of goods sold = 130 x 514.47 = 66,882
Gross profit = 63,118
Ending inventory = 60 x 514.47 = 30,868
3) LIFO
Sales = 130,000
Cost of Goods sold = (65 x 600) + (50 x 500) + (15 x 450) = 70,750
Gross profit = 130,000 - 70,750 = 59,250
Ending inventory = 60 x 450 = 27,000
b. Highest gross profit number will be when the cost of goods sold is the least. This can be done when the goods are first taken from the least cost per unit (in this case, 450). FIFO will be the way out here. Therefore, highest gross profit will be = 68,250
Lowest gross profit is when LIFO is done = 59,250
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