Question

In its first month of operation, Splish Brothers Inc. purchased 300 units of inventory for $8, then 400 units for $9, and finally 340 units for $10. At the end of the month, 380 units remained. Compute the amount of phantom profit that would result if the company used FIFO rather than LIFO.

Answer 1

The phantom profit can be calculated by comparing the cost of the inventory under FIFO and LIFO.

Step-by-step explanation:

The amount of phantom profit that would result if Splish Brothers Inc. used FIFO (First-In, First-Out) rather than LIFO (Last-In, First-Out) can be calculated by comparing the cost of the inventory under each method.

With FIFO, the cost of goods sold would be calculated using the cost of the earliest purchases first, so in this case, the cost would be $8 per unit for the first 300 units, $9 per unit for the next 100 units, and $10 per unit for the remaining 340 units.

By subtracting the cost of goods sold from the total cost of the purchases, we can determine the phantom profit that would result from using FIFO.

Answer 2

Answer: $640

Step-by-step explanation:

Phantom profits occur when historical costs and replacement costs are different .

It usually occurs when the first in, first out (FIFO) inventory system is used instead of Last in,first out (LIFO).

The total number of inventory = 300 + 400 + 340 = 1040

Total inventory sold = 1040 - 380 = 660

Under the FIFO system, cost of goods sold =

(300 × 8) + (360 × 9) = $5640

Under the LIFO system, cost of goods sold =

(340 × 10) + (320 × 9) = $6280

Phantom profit = LIFO - FIFO

$6280 - $5640 = $640