Acme Paper Products had a fire in its warehouse and must determine the cost of t

Question

Acme Paper Products had a fire in its warehouse and must determine the cost of the inventory lost to make an insurance claim. The insurance company will accept an estimate based on its historical gross profit percentage as recorded below:

2012 2013 2014 2015 2016

Sales (000) 115.3 126.7 104.8 135.8 137.5

COGS(000) 75.0 82.2 68 88.3 89.4

In 2017, the year of the fire, Acme had beginning inventory of $45,000 and purchases of $75,000. Credit and cash sales were $135,000. Based on these data, estimate the inventory loss.

Explanation / Answer

Answer

Gross margin is the difference between net sales and cost of goods sold, or netsales minus cost of goods sold. Gross margin is also known as gross profit and represents the productivity of a business's operations. A business's profitability is defined by more than its operations.

So first calculating gross profit of each year

year 2012 2013 2014 2015 2016

Sales 115.3 126.7 104.8 135.8 137.5

-Cogs    75.0 82.2 68 88.3 89.4

= Gross profit 40.3 44.5 36.8 47.5 48.1

Gross profit % 34.95% 35.12% 35.11% 34.98% 34.98%
(gp/sales)*100

Now we will take an average of gross profit percentage to find gross profit % for 2017

(34.95+35.12+35.11+34.98+34.98)/5 = 35.03%

since sales of 2017 is $135000
gross profit will be $47250
Cogs will be $87750

Now value of closing inventory can be calculated by following equation

as we know that => Sales + closing inventory = Opening inventory + purchase + gross profit

So closing inventory will be => closing inventory = Opening inventory + purchase + gross profit - Sales

= 45000 + 75000 + 47250 -135000

= $32250

So value of inventory lost for insurance claim is $ 32250.

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