Question

In 2020, the Alnoor Company purchased from Hamoorthe right to be the sole distributor in Muscat governance of a product called Zelenex in 2021.

Alnoor reports inventory using the periodic FIFO assumption. Late in 2021, the following information is available concerning the inventory of Zelenex:

Beginning inventory, 1/1/2021 (10,000 units @ $30)	$ 300,000
Purchases (40,000 units @ $30)	1,200,000
Sales (35,000 units @ $60)	2,100,000

By the end of the year, the purchase price of Zelenex had risen to $40 per unit. On December 28, 2021, three days before year-end, Alnoor is in a position to purchase 20,000 additional units of Zelenex at the $40 per unit price. Due to the increase in purchase price, Alnoor will increase the selling price in 2022 to $80 per unit. Inventory on hand before the purchase, 15,000 units, is sufficient to meet the next six months’ sales and the company does not anticipate any significant changes in purchase price during 2022.

REQUIRED:

a)      Determine the effect of the purchase of the additional 20,000 units on the 2021 gross profit from the sale of Zelenex and the payment due to Hamoor? Show calculations and explanations?

b)     Assume that during 2022 Alnoor Company bought 50,000 units of Zelenex with the new purchase price, and 40% of units available for sale had been sold. Calculate the gross profit for the company for the year 2022. Show calculations and explanations?

Answer 1

a)

Before purchase of additional 20,000 units
	Units	Price/Unit	Amount
Sale	35,000	$         60	$2,100,000
Cost of goods sold	35,000	$         30	$1,050,000
Gross Profit			$1,050,000
After the purchase of additional 20,000 units
Sale	35,000	$         60	$2,100,000
Cost of goods sold	35,000	$         30	$1,050,000
Gross Profit			$1,050,000
The impact on the gross profit of the year 2021 is $0.
Payment due to Hamoor			$2,000,000
40000*30+20000*40

2022
	Units	Price/Unit	Amount
Beg Inventory	15,000	$         30	$   450,000
	20,000	$         40	$   800,000
Purchases	50,000	$         40	$2,000,000
Units available for sale	85,000
Sales (85000*40%)	34,000	$         80	$2,720,000
Cost of goods sold
	15,000	$         30	$   450,000
	19,000	$         40	$   760,000
Total Cost of goods sold			$1,210,000
Gross Profit			$1,510,000

b)