Question

Problem 6-06A a-c You have the following information for Cullumber Company. Cullumber uses the periodic method of accounting for its inventory transactions. Cullumber only carries one brand and size of diamonds-all are identical. Each batch of diamonds purchased is carefully coded and marked with its purchase cost. March 1 Beginning inventory 140 diamonds at a cost of $315 per diamond. March 3 Purchased 190 diamonds at a cost of $355 each. March 5 Sold 170 diamonds for $600 each. March 10 Purchased 360 diamonds at a cost of $380 each. March 25 Sold 400 diamonds for $650 each. Assume that Cullumber uses the specific identification cost flow method. (1) Demonstrate how Cullumber could maximize its gross profit for the month by specifically selecting which diamonds to sell on March 5 and March 25. To maximize gross profit, Cullumber should sell the diamonds with the lowest cost. (2) Demonstrate how Cullumber could minimize its gross profit for the month by selecting which diamonds to sell on March 5 and March 25. lowest A To minimize gross profit, Cullumber should sell the diamonds with the cost.

Answer 1

Answer-
1. To maximise gross profit Cullember should sell diamonds with lowest purchase price. i.e under FIFO method.
2. To minimise gross profit Cullember should sell diamonds with highest purchase price. i.e under LIFO method.
Gross profit & cost of goods sold under FIFO
Cost of goods sold	$ 2,02,750
Gross profit	$ 1,59,250
Gross profit & cost of goods sold under LIFO
Cost of goods sold	$ 2,10,550
Gross profit	$ 1,51,450
Calculation of Inventory under FIFO method
Particulars	No. of units	Cost p.u	Total Cost
Inventory on Mar 1	140	$       315	$    44,100
Purchases on Mar 3	190	$       355	$    67,450
Purchases on Mar 10	360	$       380	$ 1,36,800
Total goods available for Sale	690		$ 2,48,350
Less: Inventory at Mar 31	120		$    45,600
Cost of goods sold (a)	570		$ 2,02,750
Sold on Mar 5	170	600	$ 1,02,000
Sold on mar 25	400	650	$ 2,60,000
Total Sales (b)	570		$ 3,62,000
Gross Profit (b-a)			$ 1,59,250
Calculation of Inventory under LIFO method
Particulars	No. of units	Cost p.u	Total Cost
Inventory on Mar 1	140	$       315	$    44,100
Purchases on Mar 3	190	$       355	$    67,450
Purchases on Mar 10	360	$       380	$ 1,36,800
Total goods available for Sale	690		$ 2,48,350
Less: Inventory at Mar31	120		$    37,800
Cost of goods sold (a)	570		$ 2,10,550
Sold on Mar 5	170	600	$ 1,02,000
Sold on mar 25	400	650	$ 2,60,000
Total Sales (b)	570		$ 3,62,000
Gross Profit (b-a)			$ 1,51,450