Question

In its first month of operation, Wildhorse Co. purchased 320 units of inventory for $5, then 420 units for $6, and finally 360 units for $7. At the end of the month, 400 units remained.

Compute the amount of phantom profit that would result if the company used FIFO rather than LIFO.

Answer 1

Solution 1,

first of all the first question is what is Phantom profit ?

answer : phantom profit is the difference between profits arising from usage of different methods.

Purchases:

320 units for $5

420 units for $6;

360 units for $7;

Total 1100 units

Sold 700 units

Ending 400 units

Under FIFO

COGS = (320 x $5) + (380 x $6) = $3,880

Under LIFO

COGS = (360 x $7) + (340 x $6) = $4,560

Phantom Profit = $4,560- $3,880 = $680