Final answer:
The estimated cost of the Sahara Company's inventory destroyed by the fire is $40,000. This figure is calculated using the gross profit method by first determining the goods available for sale, then the cost of goods sold using the gross profit ratio, and finally estimating the cost of the destroyed inventory by subtracting the value of the saved inventory. The correct answer is option b.
Step-by-step explanation:
To estimate the cost of the inventory destroyed by the Sahara Company's warehouse fire, we can use the gross profit method. This method involves the following steps:
- Calculate the goods available for sale by adding the beginning inventory and purchases.
- Determine the cost of goods sold by subtracting the ending inventory from the goods available for sale.
- Estimate the ending inventory using the gross profit ratio.
First, we add the beginning inventory ($40,000) to the purchases ($190,000) to get the goods available for sale, which amounts to $230,000 ($40,000 + $190,000).
Next, we apply the gross profit ratio, which is 30% of cost. This means that for every dollar of inventory cost, $0.70 is the cost of goods sold. Sales for the period ending on 6/3/16 were $260,000. Thus, using the ratio, we can say that the cost of goods sold is 70% of $260,000, which equals $182,000.
The estimated cost of the ending inventory (before the fire on 6/4/16) is the goods available for sale ($230,000) minus the cost of goods sold ($182,000), which is $48,000. Since inventory worth $8,000 was saved, we subtract this from the estimated ending inventory to get the estimated cost of the inventory destroyed: $48,000 - $8,000 = $40,000.
Therefore, the estimated cost of the inventory destroyed by the fire is $40,000, which corresponds to option b.