Question

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The Shirt Shop had the following transactions for T-shirts for Year 1, its first year of operations:

Jan. 20	Purchased	530	units	@	$	8	=	$	4,240
Apr. 21	Purchased	330	units	@	$	10	=		3,300
July 25	Purchased	410	units	@	$	13	=		5,330
Sept. 19	Purchased	220	units	@	$	15	=		3,300

During the year, The Shirt Shop sold 1,200 T-shirts for $24 each.

c. Compute the difference in gross margin between the FIFO and LIFO cost flow assumptions.

Answer 1

answer
	difference in gross margin between FIFO and LIFO cost flow assumtion is
	(58.47% - 51.91%)		6.56%
1	gross margin under FIFO method
	gross margin = gross profit / sales
	= sales - cost of goods sold / sales
	sales = 1200*24 =			28800
	cost of goods sold = 530*8 =			4240
	= 330*10 =			3300
	= 340*13 =			4420
				11960
	gross profit = 28800 - 11960 =			16840
	gross margin = 16840 / 28800 =			58.47%
	note:	under FIFO method unit purchased first taken for COGS
2	gross margin under LIFO method
	gross margin = gross profit / sales
	= sales - cost of goods sold / sales
	sales = 1200*24 =			28800
	cost of goods sold = 220*15 =			3300
	= 410*13=			5330
	= 330*10 =			3300
	= 240* 8 =			1920
				13850
	gross profit = 28800 - 13850 =			14950
	gross margin = 14950 / 28800 =			51.91%
	note:	under LIFO method unit purchased last taken for COGS