Question

The inventory records for Radford Co. reflected the following:

Beginning inventory @ May 1 700 units @ $3.00
First purchase @ May 7 800 units @ $3.20
Second purchase @ May 17 1000 units @ $3.30
Third purchase @ May 23 600 units @ $3.40
Sales @ May 31 2400 units @ $4.90
1. What is the amount of gross margin assuming the weighted-average inventory cost flow method? (Round your intermediate calculations to two decimal places.)
A. $3600
B. $4320
C. $4008
D. $8160

Answer 1

The correct answer is option C. $4.008.

Step-by-step explanation:

The amount of gross margin is calculated by the formula Gross Margin = Quantity sold * (sale price per unit - weight-average cost per unit). In order to get the weight-average cost per unit, you need to create a table where the weight-average cost is calculated after each purchase operation as follows: (Quantity purchased / total inventory)*purchased price+[1-(Quantity purchased / total inventory)]*inventory cost per unit. Bear in mind that the cost will change with every purchase. In this exercise you have 3 purchase operations, so you will have to calculate 3 different weight-average costs. The relevant average cost is the last one because it is the value to be used in the first formula stated.