Question

On March 15, a fire destroyed Interlock Company's entire retail inventory. The inventory on hand as of January 1 totaled $4,950,000. From January 1 through the time of the fire, the company made purchases of $2,049,000, incurred freight-in of $234,000, and had sales of $3,630,000. Assuming the rate of gross profit to selling price is 30%, what is the approximate value of the inventory that was destroyed?a. $6,144,000.b. $4,458,000.c. $4,692,000.d. $7,233,000.

Answer 1

To find the approximate value of the destroyed inventory, begin with the total goods available for sale by adding the beginning inventory to purchases and freight-in. Then, calculate COGS by taking 70% of sales since the gross profit rate is 30%. Subtract COGS from the total goods available to arrive at the approximate value of the destroyed inventory, which is $4,692,000.

Step-by-step explanation:

To calculate the approximate value of the inventory that was destroyed on March 15, we need to calculate the cost of goods sold (COGS) and then deduct it from the total goods available for sale. The total goods available for sale is the sum of the beginning inventory and additional acquisitions (purchases and freight-in). The gross profit is 30% of the selling price, which means that the cost is 70% of the selling price.

Here is how we calculate it:

• Beginning Inventory: $4,950,000
• Purchases: $2,049,000
• Freight-In: $234,000
• Total Goods Available for Sale: $4,950,000 + $2,049,000 + $234,000 = $7,233,000
• Estimated COGS (70% of Sales): 0.70 * $3,630,000 = $2,541,000
• Estimated Inventory Destroyed: $7,233,000 - $2,541,000 = $4,692,000

Therefore, the approximate value of the inventory that was destroyed is $4,692,000.

Answer 2

Answer: Option (c) is correct.

Step-by-step explanation:

Gross profit of 30% means that every $1 of Sales require $0.7 of inventory and cost of freight.

So, inventory used to generate sales of $3,630,000:

= $3,630,000 x 0.7

= $2,541,000

Total inventory during the period:

= Beginning inventory + Purchases

= $4,950,000 + $2,049,000

= $6,999,000

Remaining Inventory:

= (Total inventory - Inventory used to generate sales) + freight-in

= ($6,999,000 - $2,541,000) + $234,000

= $4,692,000