Question

The Day Shop started this accounting period with an inventory that cost $1,000 but that had a retail value of $2,000. It purchased $2,000 in new inventory, which had a retail value of $4,000. The shop's net sales at retail price was $3,000. What is the cost of goods sold?

1) $500
2) $1,000
3) $1,500
4) $2,000

Answer 1

The cost of goods sold for The Day Shop is $1,500, calculated by determining the portion of inventory sold and applying that to the total cost of the available inventory for sale.

Step-by-step explanation:

To calculate the cost of goods sold (COGS) for The Day Shop, we need to find the cost of inventory that was sold during the accounting period. Initially, the shop had an inventory that cost $1,000. Additionally, it purchased new inventory worth $2,000. The total cost of inventory available for sale is therefore the sum of these two amounts, which is $1,000 + $2,000 = $3,000.

The retail value of the inventory sold (net sales) is $3,000. Since the retail value of the total inventory the shop had was $6,000 ($2,000 initial inventory + $4,000 new inventory), the proportion of inventory sold at retail price is $3,000 / $6,000 = 1/2. To find the cost associated with the item sold, we take the same proportion of the total cost of inventory, which is 1/2 of $3,000, equaling $1,500.

Therefore, the cost of goods sold for The Day Shop is $1,500.