3--Analysis of gross profit. During 2017, King\'s Drug Company experienced a sig

Question

3--Analysis of gross profit. During 2017, King's Drug Company experienced a significant increase in the rate of gross proft on sales, compared with the rate it has averaged in recent years. You are asked to determine the most likely reason for this improvement. Support your answer. The following data are from the records of the company: 2017 sales (at an average price of $50 a unit) were $2,300,000. 2017 purchases (at an average cost of $30 a unit) were $1,200,000 The company uses the LIFO inventory method and has used it since 1988

Explanation / Answer

Solution:-

6,000 more units were sold than were purchased. This has resulted in the partial liquidation of the beginning LIFO inventory layers. Assuming rising prices, the increased rate of gross profit is most likely due to the matching of old, lower inventory costs against current sales.

Computation:-

Units sold: $2,300,000 / $50 = 46,000

Units pruchased: $1,200,000 / $30 = 40,000

Excess units were sold than purchased = 46,000 - 40,000 = 6,000 units.

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