Question

Walt Disney Co. produces a product with the following costs as of July 1, 20X1:

Material $5

Labor 4

Overhead 2

=$11

Beginning inventory at these costs on July 1 was 5,000 units. From July 1 to December 1, Walt Disney produced 13,000 units. These units had a material cost of $10 per unit. The costs for labor and overhead were the same. Walt Disney uses FIFO inventory accounting.

Assuming that Walt Disney sold 15,000 units during the last six months of the year at $20 each, what would gross profit be? What is the value of ending inventory?

Answer 1

At this level of quantity and output, the firm experiences losses of $5. Looking at the average cost compared to the price indicates the company is making losses. The marginal unit produced is subtracting from profits.

Step-by-step explanation:

a. At this level of quantity and output, the firm experiences losses (or negative profits) of $5. This can be calculated by multiplying the quantity of 5 units by the price of $25 per unit to get total revenues of $125. Then, subtract the total costs of $130 to find the losses.

b. By looking at the average cost, you can determine whether the company is making or losing money at this price. In this case, the average cost is $26 per unit, which is higher than the price of $25 per unit, indicating that the company is making losses.

c. The marginal unit produced is not adding to profits but actually subtracting from profits. The marginal cost of producing the fifth unit is $30, which is higher than the price of $25. Therefore, reducing the quantity produced may help improve profitability.

Answer 2

Using FIFO inventory accounting, Walt Disney Co.'s gross profit from the sale of 15,000 units would be $85,000, and the ending inventory value would be $48,000.

Step-by-step explanation:

Regarding the Walt Disney Co. situation and the calculation of gross profit and the value of ending inventory, using the FIFO inventory accounting method, we need to follow several steps. Since Disney uses FIFO, the first 5,000 units to be sold are accounted for at the earlier cost of $11 each (from the beginning inventory), while the remaining 10,000 units sold will be accounted for at the increased material cost of $10, plus $4 labor and $2 overhead, totaling $16 per unit.

The calculations are as follows:

• Sales Revenue: 15,000 units sold at $20 each = $300,000
• Cost of Goods Sold (COGS): (5,000 units x $11) + (10,000 units x $16) = $55,000 + $160,000 = $215,000
• Gross Profit: Sales Revenue - COGS = $300,000 - $215,000 = $85,000
• The remaining 3,000 units (13,000 produced - 10,000 sold from current production) in ending inventory are valued at the current cost: 3,000 units x $16 each = $48,000

Therefore, the gross profit for Walt Disney Co. would be $85,000, and the value of ending inventory would be $48,000.