Question

A company just starting business made the following four inventory purchases in June: June 1 150 units $ 390 June 10 200 units 585 June 15 200 units 630 June 28 150 units 510 $2,115 A physical count of merchandise inventory on June 30 reveals that there are 250 units on hand. The inventory method which results in the highest gross profit for June is

Answer 1

To determine the inventory method that results in the highest gross profit for June, calculate the COGS using FIFO, LIFO, and WAC methods. Compare the gross profits obtained from each method to find the one with the highest profit.

Step-by-step explanation:

To determine the inventory method that results in the highest gross profit for June, we need to calculate the cost of goods sold (COGS) using different inventory methods and compare the gross profits.

In this case, the company made four inventory purchases in June. We have the purchase dates, number of units purchased, and the total cost of each purchase. Additionally, a physical count on June 30 reveals that there are 250 units on hand.

By using the First-In, First-Out (FIFO) method, we assume that the first units purchased are the first ones sold. Using the information given, we can calculate the COGS for June. We start by subtracting the units on hand from the total units purchased, and then we allocate the costs to these units. By applying the same calculation to each purchase separately and summing up the costs, we can find the COGS and calculate the gross profit based on this method. Repeat the same process with the Last-In, First-Out (LIFO) method and the Weighted Average Cost (WAC) method to compare the gross profits obtained from each method. Finally, determine which method results in the highest gross profit for June.

Answer 2

FIFO will result in the highest gross profit for June.

Step-by-step explanation:

June 1 150 units $390

June 10 200 units $585

June 15 200 units $630

June 28 150 units $510

Total 700 units $2,115

Sold Units = 700 units - 250 units = 450 units

FIFO Inventory valuation method requires that the Inventory which is purchased first should be sold first and inventory Purchased at last should be sold at last.

COGS under FIFO = ( $390 + $585 + (100 x $630/200) ) = $1,290

In LIFO the unit purchased at the last will be sold first. The earlier purchases will remain in the inventory. In this inventory system the cost of goods sold is based on the recent prices of the product.

COGS under LIFO = ( $510 + $630 + (100 x $585/200) ) = $1,432.5

Weighted Average unit cost the average cost of units on hand on each day. It is calculated by dividing total inventory value by total available units.

COGS under weighted average cost of inventory = 450 x ( $2,115 / 700 ) = $1,359.6

As we know if the COGS is higher the GP will be lower and vice versa.

So the lowest COGS will give the highest GP.

FIFO gives the lowest COGS of $1,290, so this method will result in the highest gross profit for June.