Question

Suppose that Old Navy uses the periodic inventory system and had the following inventory information available: A physical count of inventory on December 31 revealed that there were 287 units on hand. Answer the following independent questions. 1. Assume that the company uses the FIFO method. The cost of the ending inventory at $ December 31 is 2. Assume that the company uses the average-cost method. The cost of the ending inventory on December 31 is 3. Assume that the company uses the LIFO method. The cost of the ending inventory on $ December 31 is 1. Assume that the company uses the FIFO method. The cost of the ending inventory at December 31 is 2. Assume that the company uses the average-cost method. The cost of the ending inventory on December 31 is 3. Assume that the company uses the LIFO method. The cost of the ending inventory on December 31 is 4. (a) Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method 4. (b) Would income have been greater or less?

Answer 1

The company's profits or losses are calculated by subtracting total costs from the total revenue generated from selling 5 units at $25 each. Profitability can be assessed by comparing average cost to the unit selling price. The marginal unit adds to profits if its cost is lower than the revenue it generates.

Step-by-step explanation:

Understanding Company Profitability

For the WipeOut Ski Company producing 5 units at a selling price of $25 each, the calculation for profits or losses needs to consider total revenue against total costs, which include fixed and variable costs. Without specific cost information from Exercise 7.3, we assume total costs are provided in that exercise to calculate profit or loss with the formula:

Profit/Loss = Total Revenue - Total Costs

Total revenue is calculated by multiplying the number of units sold (5 units) by the selling price per unit ($25), which equals $125. Without the costs details, we cannot provide the exact figure for profits or losses.

To assess profitability at a glance using the average cost, you compare it with the price per unit. If the average cost per unit is lower than the selling price per unit, the company is making money; if it's higher, the company is losing money. Lastly, the marginal unit contributes to profits if the additional cost of producing one more unit is less than the revenue it generates, which we can deduce from the marginal cost given in the previous exercise.