Question

The following accounting information pertains to Boardwalk Taffy and Beach Sweets. The only difference between the two companies is that Boardwalk Taffy uses FIFO, while Beach Sweets uses LIFO.

	Boardwalk Taffy					Beach Sweets
Cash		$	75,000				$	75,000
Accounts receivable			330,000					330,000
Merchandise inventory			230,000					186,000
Accounts payable			220,000					220,000
Cost of goods sold			1,035,000					1,432,200
Building			400,000					400,000
Sales			2,200,000					2,200,000

a-1. Compute the gross margin percentage for each company.
a-2. Identify the company that appears to be charging the higher prices in relation to its cost.
b-1. For each company, compute the inventory turnover ratio and the average days to sell inventory.
b-2. Identify the company that appears to be incurring the higher financing cost.
  

Compute the gross margin percentage for each company. (Round your answers to 1 decimal place.)

	Gross Margin Boardwalk Taffy 14.2 % Beach Sweets 31.9 %

or each company, compute the inventory turnover ratio and the average days to sell inventory. (Use 365 days in a year. Round your "Inventory Turnover Ratios" to 1 decimal place and all other answers to the nearest whole number.)

	Inventory Turnover Ratios Average Days Boardwalk Taffy 7.5 times 49 days Beach Sweets 4.9 times 74 days

Answer 1

Answer a-1:

Gross margin percentage = (Sales - cost of goods sold / sales) * 100

Boardwalk Taffy ( 2200000 - 1035000 / 2200000 ) * 100 = 52.9%

Beach sweets ( 2200000 - 1432200 / 2200000 ) * 100 = 34.9%

Answer a-2:

Higher Price -    Boardwalk Taffy

Reason : As the gross margin of Boardwalk Taffy is higher than beach sweets, it charges the higher price in relation to its cost.

Answer b-1:

Inventory turnover ratio = Cost of goods sold / Merchandise inventory

Average days = 365 / Inventory turnover ratio

	Inventory turnover ratio	Average days
Boardwalk Taffy	(1035000/230000) = 4.5 times	81 days
Beach sweets	(1432200/186000) = 7.7 times	47 days

Answer b-2:

Higher Financing cost -    Boardwalk Taffy

Reason: Boardwalk Taffy appears to be incurring higher financing cost since working capital is blocked in form of inventory for more days in case of Boardwalk Taffy.

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