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Chapter 6: Q29PGA_6 (page 367)

Steel Mill began August with 50 units of iron inventory that cost \(35 each. During August, the company completed the following inventory transactions:

Units Unit Cost Unit Sales Price

Aug. 3 Sale 45 \) 85

8 Purchase 90 $ 54

21 Sale 85 88

30 Purchase 15 58

Requirements

6. If the business wanted to maximize gross profit, which method would it select?

Short Answer

Expert verified

Under the FIFO method, the gross profit would be highest.

Step by step solution

01

Step-by-Step SolutionStep 1: Gross profit

Gross profit is the difference between the revenue generated by the sales and all the direct expenses incurred for making that sale. The direct expense includes material costs and labor costs.

02

Maximum gross profit

The gross profit under all the given methods has been computed in sub-question 5. The maximum gross profit comes under the FIFO method, which is $5,235. This is so because the COGS has been computed for the older prices against the higher current market costs.

Thus, the gross profit would be lower if the COGS has been valued at lower prices.

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Most popular questions from this chapter

Nature Foods Grocery reported the following comparative income statements for the years ended June 30, 2019 and 2018:

NATURE FOODS GROCERY
Income Statements
Years Ended June 30, 2019 and 2018

2019

2018

Net Sales Revenue

\( 134,000

\) 119,000

Cost of Goods Sold:

Beginning Merchandise Inventory

\(17,000

\)14,000

Net Cost of Purchases

78,000

67,000

Cost of Goods Available for Sale

95,000

81,000

Less: Ending Merchandise Inventory

18,000

17,000

Cost of Goods Sold

77,000

64,000

Gross Profit

57,000

55,000

Operating Expenses

26,000

21,000

Net Income

\( 31,000

\) 34,000

During 2019, Nature Foods Grocery discovered that ending 2018 merchandise inventory was overstated by $5,500.

Requirements

1. Prepare corrected income statements for the two years.

Steel It began January with 55 units of iron inventory that cost \(35 each. During January, the company completed the following inventory transactions:

Units Unit Cost Unit Sales Price

Jan. 3 Sale 45 \) 83

8 Purchase 75 $ 52

21 Sale 70 85

30 Purchase 10 55

Requirements

3. Prepare a perpetual inventory record for the merchandise inventory using theweighted-average inventory costing method.

Question:This problem continues the Canyon Canoe Company situation from Chapter 5. At the beginning of the January 2019, Canyon Canoe Company decided to carry and sellT-shirts with its logo printed on them. Canyon Canoe Company uses the perpetualinventory system to account for the inventory. During February 2019, Canyon CanoeCompany completed the following merchandising transactions:

Feb. 2 Sold 60 T-shirts at \(10 each.

5 Purchased 50 T-shirts at \)6 each.

7 Sold 45 T-shirts for \(10 each.

8 Sold 20 T-shirts for \)10 each.

10 Canyon Canoe Company realized the inventory was running

low, so it placed a rush order and purchased 20 T-shirts. The

premium cost for these shirts was \(7 each.

12 Placed a second rush order and purchased 40 T-shirts at \)7

each.

13 Sold 20 T-shirts for \(10 each.

15 Purchased 50 T-shirts for \)6 each.

20 In order to avoid future rush orders, purchased 150 T-shirts.

Due to the volume of the order, Canyon Canoe Company

was able to negotiate a cost of \(5 each.

21 Sold 40 T-shirts for \)10 each.

22 Sold 35 T-shirts for \(10 each.

24 Sold 20 T-shirts for \)10 each.

25 Sold 45 T-shirts for \(10 each.

27 Sold 40 T-shirts for \)10 each.

Requirements

1. Assume Canton Canoe Company began February with 94 T-shirts in inventorythat cost $5 each. Prepare the perpetual inventory records for February using theFIFO inventory costing method.

Question:Boston Cycles started October with 12 bicycles that cost \(42 each. On October 16, Boston bought 40 bicycles at \)68 each. On October 31, Boston sold 34 bicycles for$100 each.

Preparing a perpetual inventory record and journal entries— Weighted-average

Requirements

1. Prepare Boston Cycle’s perpetual inventory record assuming the company uses theweighted-average inventory costing method.

Futuristic Electronic Center began October with 65 units of merchandise inventory that cost \(82 each. During October, the store made the following purchases:

Oct. 3 25 units @ \) 90 each

12 30 units @ \( 90 each

18 35 units @ \) 96 each

Futuristic uses the periodic inventory system, and the physical count at October 31 indicates that 80 units of merchandise inventory are on hand.

Requirements

1. Determine the ending merchandise inventory and cost of goods sold amounts for the October financial statements using the FIFO, LIFO, and weighted-average inventory costing methods.
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