Final answer:
The cost of ending inventory is calculated using the FIFO, LIFO, or average cost methods, with each method providing a different valuation based on inventory purchase or manufacturing chronology. Profits are calculated by comparing total revenue with total cost, and decisions about the shutdown point are made by analyzing whether operating leads to smaller losses than shutting down.
Step-by-step explanation:
To compute the cost of ending inventory under the FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and average cost methods, you need to understand how each inventory method assesses the value of inventory which remains at the ending of an accounting period.
The FIFO method assumes that the oldest items purchased or manufactured are sold first, and the ending inventory consists of the most recently purchased or manufactured goods. The LIFO method assumes that the newest items are sold first, and the ending inventory consists of the oldest items. The average cost method calculates the cost of ending inventory and the cost of goods sold based on the average cost of all items available for sale during the period.
To begin the process, calculate the total cost of buying 'the basket' in each time period. Then, to calculate profits, compare total revenue with this total cost. You can identify profits and losses using the average cost curve. Additionally, it's important to explain the shutdown point, which is the level of output and price at which the firm is indifferent between producing and shutting down operations in the short run. Lastly, you'll need to determine the price at which a firm should continue producing in the short run to prevent losses greater than fixed costs.
Detailed calculations will require the actual data on quantities and costs pertaining to inventory. These can be obtained from the firm's accounting records or the hypothetical data provided in a classroom setting.