Question

PC Connection is a leading mail-order retailer of personal computers. A recent financial report issued by the company revealed the following information.

Merchandise inventory (beginning of the year) $79 million

Merchandise inventory (end of the year) $91 million

Net sales for the year $2.46 billion

gross profit margin 13%

A. compute the company's cost of goods sold for the year

b. approximately how much inventory did PC Connection purchase during the year?

c. what factors might contribute to the company's low gross profit margin?

d. discuss reasons why PC Connection uses a perpetual inventory system.

Answer 1

• Answer ‘A’

Net Sales = $2.46 billions
Gross profit margin = 13%

Gross Profits = 2.46 x 13% = $ 0.3198 billions

Cost of Goods Sold = Net Sales – Gross Profits
= $2.46 billions – $ 0.3198 billions = $ 2.1402 billions (or $ 2140.2 millions)

Cost of Goods Sold = $ 2.1402 billions

• Answer ‘B’

Equation: Beginning Inventory + Purchased inventory – Ending Inventory = Cost of Goods Sold.

$ 79 millions + Purchased Inventory - $ 91 millions = $ 2140.2 millions
79 + Purchased Inventory – 91 = 2140.2
purchased Inventory = 2140.2 + 91 – 79.
Purchased Inventory = $ 2152.2 millions

• Answer ‘C’

Factors for low gross profit can be:
--Fall in market (sale) prices
--Increase in cost of production
--undervaluation of Ending inventories.

• Answer ‘D’

PC connections might be using perpetual Inventory System because perpetual inventory system provide more accurate valuation data than periodic inventory system. Also, inventory records are continuously updated. The risk of misstatement and errors are minimum.