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, 2016, fiscal year-end inventory consisted of the following (listed in chronological order of acquisition):

The replacement cost of the grills throughout 2017 was $800. Cast Iron sold 35,000 grills during 2017. The company's selling price is set at 200% of the current replacement cost.

Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2017 assuming that Cast Iron purchased 36,000 units during the year.

Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2017 assuming that Cast Iron purchased only 19,000 units during the year. (Round "Gross profit ratio" answer to 1 decimal place (i.e., 0.123 needs to be entered as 12.3%.))

Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2017 assuming that Cast Iron purchased 36,000 units (as per requirement 1) and 19,000 units (as per requirement 2) during the year and uses the FIFO inventory cost method rather than the LIFO method. (Round "Gross profit ratio" answer to 1 decimal place (i.e., 0.123 needs to be entered as 12.3%.))

Explanation / Answer

Answer :

Gross Profit Ratio = Gross Profit / Sales * 100
Gross Profit = Sales – Cost of goods sold
Selling Price per unit = $800 * 200% = $1,600

Requirement no. 1

Sales = 35,000 * $1,600 = $56,000,000
Cost of goods sold = 35,000 * $800 = $28,000,000
Gross Profit = $56,000,000 - $28,000,000
Gross Profit = $28,000,000

Gross Profit Ratio = 28,000,000 / 56,000,000 * 100
Gross Profit Ratio = 50%

Requirement no. 2

Sales = 35,000 * $1,600 = $56,000,000
Cost of goods sold = (19,000 * $800) + (7,600 * $700) + (4,800 * $600) + (3,600 * $500)
Cost of goods sold = $15,200,000 + $5,320,000 + $2,880,000 + $1,800,000
Cost of goods sold = $25,200,000
Gross Profit = $56,000,000 - $25,200,000
Gross Profit = $30,800,000

Gross Profit Ratio = 30,800,000 / 56,000,000 * 100
Gross Profit Ratio = 55%

Requirement no. 4

Units Purchased during the Year is 36,000 units:

Sales = 35,000 * $1,600 = $56,000,000
Cost of goods sold = (6,600 * $500) + (4,800 * $600) + (7,600 * $700) + (16,000 * $800)
Cost of goods sold = $3,300,000 + $2,880,000 + $5,320,000 + $12,800,000
Cost of goods sold = $24,300,000

Gross Profit = $56,000,000 - $24,300,000
Gross Profit = $31,700,000

Gross Profit Ratio = 31,700,000 / 56,000,000 * 100
Gross Profit Ratio = 56.6%

Units Purchased during the Year is 19,000 units:

The answer will be same as if the units purchased during the year is 36,000 units:

Sales = 35,000 * $1,600 = $56,000,000
Cost of goods sold = (6,600 * $500) + (4,800 * $600) + (7,600 * $700) + (16,000 * $800)
Cost of goods sold = $3,300,000 + $2,880,000 + $5,320,000 + $12,800,000
Cost of goods sold = $24,300,000

Gross Profit = $56,000,000 - $24,300,000
Gross Profit = $31,700,000

Gross Profit Ratio = 31,700,000 / 56,000,000 * 100
Gross Profit Ratio = 56.6%

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