Question

Cast Iron Grills, Inc., manufactures premium gas barbecue grills. The company reports inventory and cost of goods sold based on calculations from a LIFO periodic inventory system. Cast Iron’s December 31, 2021, fiscal year-end inventory consisted of the following (listed in chronological order of acquisition):

Units	Unit Cost
6,400	$	400
4,700		500
7,400		600

The replacement cost of the grills throughout 2022 was $700. Cast Iron sold 34,000 grills during 2022. The company's selling price is set at 200% of the current replacement cost.

Required:
1. & 2. Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2022 under two different assumptions. First, that Cast Iron purchased 35,000 units and, second, that Cast Iron purchased 18,500 units during the year.
4. Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2022 assuming that Cast Iron purchased 35,000 units (as per the first assumption) and 18,500 units (as per the second assumption) during the year and uses the FIFO inventory cost method rather than the LIFO method.

Answer 1

Solution:

Requirement 1&2. Under LIFO method, it is assumed that inventory purchased last is sold first.

Sales Units = 34,000

Selling Price = 200%*Replacement Cost = 200%*$700 = $1,400

Cast Iron purchased 35,000 units

Sales (34,000 * $1,400)	$47,600,000
Less: Cost of goods sold (34,000 * $700)	$23,800,000
Gross Profit	$23,800,000

Gross Profit Ratio = Gross Profit/Sales

= $23,800,000 / $47,600,000 = 50%

Cast Iron purchased 18,500 units during the year.

Sales (34,000 * $1,400)	$47,600,000
Less: Cost of goods sold (18,500*$700+7,400*$600+4,700*$500+3,400*$400)	$21,100,000
Gross Profit	$26,500,000

Gross Profit Ratio = 26,500,000/47,600,000

= 55.67%

Requirement 4. FIFO method assumes that inventory purchased first will be sold first.

Cast Iron purchased 35,000 units:

Sales (34,000 * $1,400)	$47,600,000
Less: Cost of goods sold (6,400*$400+4,700*$500+7,400*$600+15,500*$700)	$20,200,000
Gross Profit	$27,400,000

Gross Profit Ratio = 27,400,000/47,600,000

= 57.56%

Cast Iron purchased 18,500 units during the year:

Sales (34,000 * $1,400)	$47,600,000
Less: Cost of goods sold (6,400*$400+4,700*$500+7,400*$600+15,500*$700)	$20,200,000
Gross Profit	$27,400,000

Gross Profit Ratio = 27,400,000/47,600,000

= 57.56%

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