Question

Retail Inventory Method

Beginning Inventory
At cost	$100,000
At retail	$125,000
Net purchases
At cost	$300,000
At retail	$360,000
Net markups	$15,000
Net markdowns	$10,000
Net sales at retail	$280,000
Average cost per unit	$8.00
Average selling price per unit	$10.00

Using the gross profit inventory estimation method:

1. Compute gross profit on sales.

2. Compute cost of goods sold.

3. Compute the estimated cost of ending inventory.

Using the conventional (average LCM) inventory estimation method:

1. Compute the ending inventory at retail.

2. Compute cost-to-retail ratio.

3. Compute the estimated cost of ending inventory.

Answer 1

Solution : Gross profit inventory estimation method

1). Computation of gross profit on sales :

Average selling price per unit = $ 10

Average cost per unit = $ 8

Gross profit = $ 2

Gross profit (%) on sales = $2 / $ 10 X 100 = 20%

Hence it's cost of goods sold would be 80% of sales.

2). Cost of goods sold = Sales X 80%

= $ 2,80,000 X 80%

= $ 2,24,000

3). Estimated Cost of ending inventory = Cost of goods available for sale - Cost of goods sold

= $ 4,00,000 - $ 2,24,000

= $ 1,76,000

Working :

Cost of goods available for sale = Begning inventory at cost + Net purchases at cost

= $ 1,00,000 + $ 3,00,000

= $ 4,00,000

Conventional inventory estimation method :

1). Computation of ending inventory at retail :

Begning inventory at retail = $ 1,25,000

Add : Net purchases at retail = $ 3,60,000

Add: Net markups. = $ 15,000

Less : Net markdowns. = $ 10,000

_________________

$ 4,90,000

Less: Net Sales at retail. $ 2,80,000

_____________________

Estimated ending inventory $ 2,10,000

at retail

2). Computation of cost to retail ratio :-

Begning inventory at cost. = $ 1,00,000

Add: Net purchases at cost = $ 3,00,000

__________________

$ 4,00,000

Cost to retail ratio = $ 4,00,000 / $ 4,90,000 X 100 = 81.63%

3). Computation of estimated cost of ending inventory :

= Estimated ending inventory at retail x cost to retail ratio

= $ 2,10,000 X 81.63%

= $ 1,71,423