Question

Toy Mart has inventory that was destroyed by fire. Apply the gross profit method to estimate their ending inventory assuming the following information.

$60,000
$20,000
$50,000
$40,000

Answer 1

To calculate the firm's accounting profit, subtract the total explicit costs of labor, capital, and materials from the sales revenue. The firm's accounting profit is $50,000.

Step-by-step explanation:

The gross profit method is a way to estimate a company's ending inventory, which might be necessary if the inventory has been destroyed or lost. However, no clear information regarding the beginning inventory, purchases, sales, or gross profit percentage was provided here. The typical gross profit method formula is: Beginning Inventory + Purchases - Sales = Cost of Goods Sold (COGS), and then COGS subtracted from Sales at the Gross Profit Rate gives the estimated ending inventory.

For the provided self-check questions, to calculate the firm's accounting profit, we total the explicit costs (labor, capital, and materials) and subtract them from the sales revenue. The calculation would be: $1,000,000 (sales revenue) - ($600,000 (labor) + $150,000 (capital) + $200,000 (materials)) = $50,000 (accounting profit).

Answer 2

Estimated Ending Inventory: $30,000
Estimated COGS: $10,000

To estimate the ending inventory using the gross profit method, we need to calculate the cost of goods sold (COGS) and the gross profit ratio.

Step 1: Calculate the COGS.
The COGS can be calculated using the formula: Beginning Inventory + Purchases - Ending Inventory = COGS.
Since we are trying to estimate the ending inventory, we need to rearrange the formula as: Beginning Inventory + Purchases - COGS = Ending Inventory.

Given information:
Beginning Inventory = $60,000
Purchases = $20,000
COGS = $50,000 (assumed value)

Using the formula, we can calculate the estimated ending inventory:
$60,000 + $20,000 - $50,000 = $30,000

So, the estimated ending inventory is $30,000.

Step 2: Calculate the gross profit ratio.
The gross profit ratio can be calculated using the formula: Gross Profit / Net Sales = Gross Profit Ratio.
We can rearrange the formula as: Gross Profit = Gross Profit Ratio * Net Sales.

Given information:
Gross Profit Ratio = (Gross Profit / Net Sales) = $40,000 / $50,000 = 0.8 (or 80%)
Net Sales = $50,000

Using the formula, we can calculate the gross profit:
Gross Profit = 0.8 * $50,000 = $40,000

Step 3: Calculate the estimated ending inventory.
We can now calculate the estimated ending inventory using the formula: Net Sales - COGS = Gross Profit.
Rearranging the formula, we have: Net Sales - Gross Profit = COGS.

Given information:
Net Sales = $50,000
Gross Profit = $40,000

Using the formula, we can calculate the estimated COGS:
$50,000 - $40,000 = $10,000

So, the estimated COGS is $10,000.