Question

H. Hunter Company's records indicate the following information for the year:

Merchandise inventory, 1/1
$ 550,000
Purchases
2,250,000
Net sales
3,200,000
On December 31, a physical inventory determined that ending inventory of $500,000 was in the warehouse. H. Hunter's gross profit on sales has remained constant at 30%.
H. Hunter suspects some of the inventory may have been taken by some new employees. At December 31, what is the estimated cost of missing inventory?
A) $60,000
B) $100,000
C) $150,000
D) $1,340,000

Answer 1

To estimate the cost of the missing inventory, we can use the gross profit margin. By calculating the cost of goods sold and net sales, we can determine the gross profit margin. Assuming the missing inventory had the same margin, we divide the missing inventory by the margin to find the estimated cost.

Step-by-step explanation:

To estimate the cost of the missing inventory, we can use the gross profit margin. The gross profit margin is calculated by subtracting the cost of goods sold (COGS) from net sales and then dividing by net sales.

In this case, the net sales are $3,200,000 and the COGS can be calculated as follows:

1. Beginning inventory: $550,000
2. Purchases: $2,250,000
3. Cost of goods available for sale: $550,000 + $2,250,000 = $2,800,000
4. Ending inventory: $500,000
5. Cost of goods sold: $2,800,000 - $500,000 = $2,300,000

Now we can calculate the gross profit margin:

Gross profit margin = (Net sales - COGS) / Net sales = ($3,200,000 - $2,300,000) / $3,200,000 = 0.28125 or 28.125%

If we assume that the missing inventory had the same gross profit margin of 28.125%, we can estimate the cost of missing inventory as:

Estimated cost of missing inventory = Missing inventory / Gross profit margin = $500,000 / 0.28125 = $1,780,000

Therefore, the estimated cost of the missing inventory is $1,780,000. The closest option to this is D) $1,340,000.