Topanga Group began operations early in 2018. Inventory purchase information for

Question

Topanga Group began operations early in 2018. Inventory purchase information for the quarter ended March 31, 2018, for Topanga's only product is provided below. The unit costs include the cost of freight. The company uses a periodic inventoryy system Date of Purchase Jan. 7 Feb. 16 March 22 Units 8,000 17,000 21,000 46,000 Unit Cost $3.00 4.00 5.00 Total Cost 24,000 68,000 105,000 197,000 Totals Sales for the quarter, all at $9 per unit, totaled 26,000 units leaving 20,000 units on hand at the end of the quarter Required: 1. Calculate Topanga's cost of goods sold for the first quarter using a. FIFO b. LIFO c. Average cost 2. Calculate Toponga's gross profit ratio for the first quarter using FIFO, LIFO, and Average cost. 3. Comment on the relative effect of each of the three inventory methods on the gross profit ratio

Explanation / Answer

1.

a)FIFO = (8000*3)+(17000*4)+(1000*5) = $97,000

b) LIFO = (21000*5)+(5000*4) = $125000

c) Avg cost = 197000/46000*26000 = $111348

2.Gross Profit under FIFO = (26000*9) - 97000

=137000

Gross profit ratio = 137000/234000 = 58.55%

Gross profit under LIFO = 234000-125000 = 109000

Gross profit ratio = 109000/234000 = 46.58%

Gross Profit under weighted average = 234000 - 111348 = 122652

Gross Profit ratio = 122652/234000 = 52.42%

3.Since prices tend to rise over a period of time, FIFO reflects highest % of gross profits & LIFO the lowest.

Looking forward to your upvote.

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