Question

Three retail giants, Best Buy, Amazon, and Target each use a different inventory costing method. Best Buy uses weighted-average cost, Amazon uses FIFO, and Target uses LIFO.

Assume that all three retailers sell a popular shirt that retails for $30. To compare the impact of inventory costing method, we will also assume that all three retailers have the following inventory and sales data for the same period:

• Beginning inventory: 40 units @ $7.00
• Purchases: 35 units @ $10.00
• Sales: 50 units
• Ending inventory: 25 units

Questions

1. Calculate sales revenue, cost of goods sold, gross profit, and cost of ending inventory for Best Buy using the weighted-average inventory costing method. (Only numerical answers needed; round to the nearest cent– 4pts)
2. Calculate sales revenue, cost of goods sold, gross profit, and cost of ending inventory for Amazon using the FIFO inventory costing method. (Only numerical answers needed – 4pts)
3. Calculate sales revenue, cost of goods sold, gross profit, and cost of ending inventory for Target using the LIFO inventory costing method. (Only numerical answers needed – 4pts)
4. If your suppliers increase the price they charge you to buy inventory over a given period of time, would FIFO or LIFO result in the highest net income? Explain. (3pts)

Answer 1

	Best Buy	Amazon	Target
Sales revenue (50 x $30)	1500	1500	1500
Cost of goods sold	420	380	455
Gross profit	1080	1120	1045
Cost of ending inventory	210	250	175

FIFO would result in highest net income

Since the prices of inventory are rising, the cost of goods sold will be lower under the FIFO method thereby resulting in a higher net income.

Working:

Best Buy:

Weighted average rate = [(40 x $7) + (35 x $10)]/(40 + 35) = [$280 + $350]/75 = $630/75 = $8.40

Cost of goods sold = 50 x $8.40 = $420

Cost of ending inventory = 25 x $8.40 = $210

Amazon:

Cost of goods sold = (40 x $7) + (10 x $10) = $280 + $100 = $380

Cost of ending inventory = (25 x $10) = $250

Target:

Cost of goods sold = (35 x $10) + (15 x $7) = $350 + $105 = $455

Cost of ending inventory = (25 x $7) = $175