Question

Cast Iron Grills, Inc., manufactures premium gas barbecue grills. The company uses a periodic inventory system and the LIFO cost method for its grill inventory. Cast Iron's December 31, 2016, fiscal year-end inventory consisted of the following (listed in chronological order of acquisition):

Units	Unit Cost
8,800	$	600
5,900		700
9,800		800

The replacement cost of the grills throughout 2017 was $900. Cast Iron sold 46,000 grills during 2017. The company's selling price is set at 200% of the current replacement cost.

1. Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2017 assuming that Cast Iron purchased 47,000 units during the year. Gross profit Gross profit ratio 2. Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2017 assuming that Cast Iron purchased only 24,500 units during the year. (Round "Gross profit ratio" answer to 1 decimal place (i.e., 0.123 needs to be entered as 12.3%.)) Gross profit Gross profit ratio

Answer 1

1.LIFO method states that inventory purchased later will be sold first

Gross Profit = Sales – Cost of goods sold

= 46,000*1,800 – 46,000*900 = 41,400,000

Gross Profit Ratio = Gross Profit/Sales

=50%

Purchased 24,500 units

2.Gross Profit = 46,000*1,800 – (24,500*900+9,800*800 + 5,900*700 + 5,800*600)

= $45,300,000

Gross profit ratio = 45,300,000/82,800,000

= 54.71%

3.Since When the number of units purchased is lower than units sold, the extra units will be sold from beginning inventory purchased at lower cost

4.FIFO method states that inventory purchased first will be sold first

Gross Profit = 46,000*1,800 – (8,800*600+5,900*700+9,800*800+21,500*900)

= $46,200,000

Gross profit ratio = 46,200,000/82,800,000 = 55.797% or 55.8%

Same answer for both cases