Chapter 9: 15E (page 479)

Tim Legler requires an estimate of the cost of goods lost by fire on March 9. Merchandise on hand on January 1 was $38,000. Purchases since January 1 were $72,000; freight-in, $3,400; purchase returns and allowances, $2,400. Sales are made at 331 /3% above cost and totaled $100,000 to March 9. Goods costing $10,900 were left undamaged by the fire; remaining goods were destroyed. Instructions (a) Compute the cost of goods destroyed. (b) Compute the cost of goods destroyed, assuming that the gross profit is 331 /3% of sales.

Short Answer

Expert verified

(a) Cost of goods destroyed equals $25,100.

(b) Cost of goods destroyed equals $33,433.33.

Step by step solution

Calculation of gross profit on sales

Gross profit on sales is calculated as follows:

$\begin{array}{rcl} Gross profit percentage on sales & = & \frac{Percentage markup on costs}{100 % + Percentage markup on costs} \\ = & \frac{33 \frac{1}{3} %}{100 % + 33 \frac{1}{3} %} \\ = & 25 % \end{array}$

Calculation of cost of goods sold

Cost of goods sold is calculated as follows:

$\begin{array}{rcl} Cost of goods sold & = & Sales revenue \times (1 - Gross profit) \\ = & $ 100, 000 \times (1 - 25 %) \\ = & $ 75, 000 \end{array}$

Calculation of goods destroyed

(a) Calculation of cost of goods destroyed is calculated as follows:

$\begin{array}{rcl} Cost of goods destroyed & = & Beginning inventory + (Purchases - Purchase return + Freight in) - Cost of goods sold - Undamaged goods \\ = & $ 38, 000 + ($ 72, 000 - $ 2, 400 + $ 3, 400) - $ 75, 000 - $ 10, 900 \\ = & $ 25, 100 \end{array}$

Calculation of cost of goods sold

Cost of goods sold is calculated as follows:

$\begin{array}{rcl} Cost of goods sold & = & Sales revenue \times (1 - Gross profit percentage) \\ = & $ 100, 000 \times (1 - 33 \frac{1}{3} %) \\ = & $ 66, 666.67 \end{array}$

Calculation of goods destroyed

(a) Calculation of cost of goods destroyed is calculated as follows:

Thus, cost of goods destroyed in case (a) equals $25,100, and in case (b) equals $33,433.33.

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Short Answer

Step by step solution

Calculation of gross profit on sales

Calculation of cost of goods sold

Calculation of goods destroyed

Calculation of cost of goods sold

Calculation of goods destroyed

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