Question

2: Relative sales value method.

Armstrong Company purchased a plot of ground for $800,000 and spent $2,100,000 in developing it for building lots. The lots were classified into Highland, Midland, and Lowland grades, to sell at $100,000, $75,000, and $50,000 each, respectively.

Instructions: Complete the table below to allocate the cost of the lots using a relative sales value method.

Grade	#ofLots	Selling Price	Total Revenue	% of Total Sales	TotalCost	CostPerLot
Highland	20
Midland	40
Lowland	100
	160		$		$	$

Answer 1

Answer

Grade	No. of Lots	Selling Price	Total Revenue	% of Total Sales	Total Cost	Cost per Lot
Highland	20	100,000	2,000,000	20%	580,000	29,000
Midland	40	75,000	3,000,000	30%	870,000	21,750
Lowland	100	50,000	5,000,000	50%	1,450,000	14,500
Total	160		10,000,000	100%	2,900,000

% of Total Sales = (Individual Sales / Total Sales) * 100

Total Cost = Cost of Land + Cost of Developing Plots

= 800,000 + 2,100,000

Total Cost= $2,900,000

Now to find Individual Grade Cost, we will divide the total cost in Sales ratio i.e. in 20: 30: 50

Highland Grade Cost = 20% * $2,900,000 = $580,000

Midland Grade Cost = 30% * $2,900,000 = $870,000

Lowland Grade Cost = 50% * $2,900,000 = $1,450,000

Cost per Lot = Total Grade Cost / No. of Lots

Highland = 580,000 / 20 Lots = $29,000 per lot

Midland = 870,000 / 40 Lots = $21,750 per lot

Lowland = 1,450,000 / 100 Lots = $14,500 per lot