Final answer:
To estimate the cost of goods destroyed by fire for Sheridan Legler, we calculate the cost of goods available for sale by adding opening inventory, purchases, and freight-in, and subtracting purchase returns and allowances. We then determine the cost of goods sold using the sales figure and gross profit percentage. Finally, we deduct the cost of undamaged goods from the cost of goods on hand to find the cost of goods destroyed.
Step-by-step explanation:
Sheridan Legler seeks to estimate the cost of goods destroyed by a fire. To compute this, we would consider the opening inventory, purchases, freight-in, purchase returns and allowances, sales, and the cost of goods that were not damaged. The following is the calculation of the cost of goods destroyed:
- Opening Inventory on January 1: $34,960
- Add: Purchases: $66,240
- Add: Freight-in: $3,128
- Less: Purchase Returns and Allowances: -$2,208
The goods available for sale before the fire would be the sum of opening inventory, purchases, and freight-in minus the purchase returns and allowances. Now, to adjust for the sales, we consider that sales are made at a markup of 33 1/3% above the cost, which implies a gross profit rate of 25% (33 1/3% of sales is 25% of the cost). Thus, we can find the cost of goods sold (CGS) by applying this rate to the total sales figure of $102,000.
So, the calculation for the cost of goods sold before the fire is:
Cost of Goods Sold (CGS) = Sales / (1 + Gross Profit Rate) = $102,000 / 1.25
This gives us the CGS before the fire. By subtracting this figure from the goods available for sale, we can estimate the cost of the goods on hand at the time of the fire.
Moreover, out of the goods on hand, $10,028 worth was left undamaged. By subtracting this from the estimated goods on hand, we arrive at the cost of goods destroyed by the fire, which is the value sought by Sheridan Legler.
Remember to round off the gross profit percentage and the final answer to zero decimal places, as instructed for the estimate.