Question

What is the estimated cost of goods sold using the cost to retail method in step 4?

Answer 1

The information given pertains to the calculation of price indices and the inflation rate, not the COGS. Price indices are calculated for each year using year 1 and year 4 as base years, followed by the calculation of the inflation rate based on changes in these indices. Although the calculated index values would vary depending on the chosen base year, the underlying inflation rate remains consistent, only represented from different perspectives.

Step-by-step explanation:

The question involves calculating the cost of goods sold using the cost to retail method, which is a method used in accounting and finance to estimate the value of inventory sold during a period. However, from the provided information, it seems the student has confused two different concepts: cost of goods sold (COGS) estimation and price index calculation. The information given and the steps described actually pertain to the calculation of price indices and the inflation rate, not the COGS.

First, to calculate the price indices using year 1 and year 4 as base years, we perform the following steps:

1. Divide the total cost of the basket of goods in each year by the cost in the base year.
2. Multiply the result by 100 to get the price index for each year.

Using year 1 as a base year (year 1=£940, so it is set equal to 100):

• Year 1 index = (£940/£940)× 100 = 100
• Year 2 index = (£970/£940) ×100 ≈ 103.19
• Year 3 index = (£1000/£940) × 100 ≈ 106.38
• Year 4 index = (£1070/£940) × 100 ≈ 113.83

Using year 4 as a base year (year 4=£1070, so it is set equal to 100):

• Year 1 index = (£940/£1070)× 100 ≈ 87.85
• Year 2 index = (£970/£1070)× 100 ≈ 90.65
• Year 3 index = (£1000/£1070)× 100 ≈ 93.46
• Year 4 index = (£1070/£1070)× 100 = 100

Then, the inflation rate based on the first price index is calculated by taking the percentage change in index from one year to the next. For instance, the inflation rate from year 1 to year 2 is given by ((103.19 - 100) / 100) * 100 ≈ 3.19%.

If you calculate the inflation rate using the second price index (with year 4 as the base), the percentage changes will be different but it represents the same inflation trend from a different perspective. The actual inflation rate does not change, it's just expressed differently depending on the base year selected.