Question 2: LIFO liquidation Cast Iron Grills, Inc., manufactures premium gas ba

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Question 2: LIFO liquidation 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 5,000 $700 4,000 800 6,000 900 The replacement cost of the grills throughout 2019 was S1,000. Cast Iron sold 27,000 grills during 2019. The company's selling price is set at 200% of the current replacement cost. Required: 1.Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2019 assuming that Cast Iron purchased 28,000 units during the year. 2. Repeat requirement 1 assuming that Cast Iron purchased only 15,000 units. 3. Why does the number of units purchased affect your answers to the above requirements? 4. Repeat requirements 1 and 2 assuming that Cast Iron uses the FIFO inventory cost method rather than the LIFO method. 5. Why does the number of units purchased have no effect on your answers to requirements 1 and 2 when the FIFO method is used?

Explanation / Answer

1 COMPUTATION OF GROSS PROFIT LIFO COST METHOD(Periodic Inventory) Quantity Sold (Units)                         27,000 Quantity Purchased(Units)                         28,000 Beginning inventory (units)                         15,000 Ending Inventory                         16,000 (15000+28000-27000) Cost of ending inventory under LIFO: Units Cost/unit Amount 5000 $700 $3,500,000 4000 $800 $3,200,000 6000 $900 $5,400,000 1000 $1,000 $1,000,000 Total $13,100,000 Beginning Inventory Units Cost/unit Amount 5000 $700 $3,500,000 4000 $800 $3,200,000 6000 $900 $5,400,000 Total $12,100,000 Purchase 28000 $1,000 $28,000,000 Beginning Inventory $12,100,000 Add: Purchase $28,000,000 Total available $40,100,000 Less: Ending Inventory $13,100,000 Cost of goods sold $27,000,000 Sales $            54,000,000 (27000*2000) (200% of 1000) Cost of goods sold $27,000,000 Gross Profit $            27,000,000 Gross Profit Ratio 0.5 (27000000/54000000) 2 Purchased 15000 units Quantity Sold (Units)                         27,000 Quantity Purchased(Units)                         15,000 Beginning inventory (units)                         15,000 Ending Inventory                           3,000 (15000+15000-27000) Cost of ending inventory under LIFO: Units Cost/unit Amount 3000 $700 $2,100,000 Cost of ending inventory under LIFO: $2,100,000 Beginning Inventory $12,100,000 Add: Purchase $15,000,000 (15000*1000) Total available $27,100,000 Less: Ending Inventory $2,100,000 Cost of goods sold $25,000,000 Sales $            54,000,000 Cost of goods sold $25,000,000 Gross Profit $            29,000,000 Gross Profit Ratio 0.537037037 3 The ending inventory value depends on number of units purchased If number of units purchased is less , Easrlier inventory at lower costs will be sold under LIFO This will reduce the cost of sales and increase gross profit 4 FIFO METHOD Purchase Quantity 28000 units Quantity Sold (Units)                         27,000 Quantity Purchased(Units)                         28,000 Beginning inventory (units)                         15,000 Ending Inventory                         16,000 (15000+28000-27000) Cost of ending inventory under FIFO: Units Cost/unit Amount 16000 $1,000 $16,000,000 Beginning Inventory Units Cost/unit Amount 5000 $700 $3,500,000 4000 $800 $3,200,000 6000 $900 $5,400,000 Total $12,100,000 Purchase 28000 $1,000 $28,000,000 Beginning Inventory $12,100,000 Add: Purchase $28,000,000 Total available $40,100,000 Less: Ending Inventory $16,000,000 Cost of goods sold $24,100,000 Sales $            54,000,000 (27000*2000) (200% of 1000) Cost of goods sold $24,100,000 Gross Profit $            29,900,000 Gross Profit Ratio 0.553703704 PURCHASE OF 15000 Units(FIFO METHOD) Quantity Sold (Units)                         27,000 Quantity Purchased(Units)                         15,000 Beginning inventory (units)                         15,000 Ending Inventory                           3,000 (15000+15000-27000) Cost of ending inventory under FIFO: Units Cost/unit Amount 3000 $1,000 $3,000,000 Beginning Inventory Units Cost/unit Amount 5000 $700 $3,500,000 4000 $800 $3,200,000 6000 $900 $5,400,000 Total $12,100,000 Purchase 15000 $1,000 $15,000,000 Beginning Inventory $12,100,000 Add: Purchase $15,000,000 Total available $27,100,000 Less: Ending Inventory $3,000,000 Cost of goods sold $24,100,000 Sales $            54,000,000 (27000*2000) (200% of 1000) Cost of goods sold $24,100,000 Gross Profit $            29,900,000 Gross Profit Ratio 0.553703704 5 Numbers purchased has no effect because under FIFO , in both cases The beginning inventory is charged to cost of goods sold. The balance inventory charged have the same unit cost of purchase

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