Question

Cast Iron Grills, Inc., manufactures premium gas barbecue grills. The company uses a periodic inventory system and the LIFO cost method for its grill inventory. Cast Iron's December 31, 2018, fiscal year-end inventory consisted of the following (listed in chronological order of acquisition):

Units Unit Cost

7,000 $ 700

5,000 800

8,000 900

The replacement cost of the grills throughout 2019 was $1,000. Cast Iron sold 37,000 grills during 2019. The company's selling price is set at 200% of the current replacement cost. Required:

a. & b. Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2019 under two different assumptions. First, that Cast Iron purchased 38,000 units and, second, that Cast Iron purchased 20,000 units during the year.

c. Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2019 assuming that Cast Iron purchased 38,000 units (as per the first assumption) and 20,000 units (as per the second assumption) during the year and uses the FIFO inventory cost method rather than the LIFO method.

Answer 1

SOLUTION

(A&B)-

Assumption 1-

	Amount ($)
Sales (37,000*$1,000*200%)	74,000,000
less: Cost of goods sold (37,000*$1,000)	37,000,000
Gross profit	37,000,000

Gross profit ratio = Gross profit / sales

= $37,000,000 / 74,000,000 = 50%

Assumption 2-

	Amount ($)
Sales (37,000*$1,000*200%)	74,000,000
less: Cost of goods sold *	34,000,000
Gross profit	40,000,000

Gross profit ratio = Gross profit / sales

= $40,000,000 / 74,000,000 = 54.05%

* Cost of goods sold-

	Amount ($)
20,000*$1,000	20,000,000
8,000*900	7,200,000
5,000*$800	4,000,000
4,000*$700	2,800,000
	34,000,000

(C)

	Amount ($)
Sales (37,000*$1,000*200%)	74,000,000
less: Cost of goods sold *	33,100,000
Gross profit	40,900,000

Gross profit ratio = Gross profit / sales

= $40,900,000 / 74,000,000 = 55.27%

* Cost of goods sold-

	Amount ($)
7,000*$700	4,900,000
5,000*800	4,000,000
8,000*$900	7,200,000
17,000*$1,000	17,000,000
	33,100,000