Step-by-step explanation:
To calculate the cost of inventory lost in the fire, we need to find the cost of the inventory that was destroyed. We can use the cost of goods sold (COGS) formula, which is:
COGS = Opening Inventory + Purchases - Closing Inventory
Given information:
Margin = 34%
Sales = £500,000
Opening Inventory = £78,000
Purchases = £340,000
Closing Inventory after fire = £28,000
First, let's calculate the cost of goods sold (COGS):
COGS = £78,000 + £340,000 - £28,000
COGS = £390,000
Now, we can use the margin percentage to find the cost of inventory lost in the fire:
Margin = (Gross Profit / Sales) * 100
34% = (Gross Profit / £500,000) * 100
Let's solve for Gross Profit:
Gross Profit = (34% * £500,000) / 100
Gross Profit = £170,000
The cost of inventory lost in the fire is the gross profit minus the cost of goods sold:
Cost of Inventory Lost = Gross Profit - COGS
Cost of Inventory Lost = £170,000 - £390,000
Cost of Inventory Lost = -£220,000
The negative value indicates that there is a loss of £220,000 in inventory due to the fire.