Question

Exercise 9-11 Gross profit method [L09-2] Royal Gorge Company uses the gross profit method to estimate ending inventory and cost of goods sold when preparing monthly financial statements required by its bank. Inventory on hand at the end of October was $59,000. The following information for the month of November was available from company records: Purchases Praight-in Sales Sales returns Purchases returns $115,000 3,500 205,000 7.500 6,500 In addition, the controller is aware of $10,500 of Inventory that was stolen during November from one of the company's warehouses. Required: 1. Calculate the estimated Inventory at the end of November, assuming a gross profit ratio of 40% 2. Calculate the estimated Inventory at the end of November, assuming a markup on cost of 100%

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  1) Assuming Gross profit ratio of 40%:
  Particulars	Amount ($)	Amount ($)
  Beginning inventory		59,000
  Plus: Net Purchases (115,000-6,500)		108500
  Freight-in		3,500
  Cost of goods available for sale		1,71,000
  Less: Cost of goods sold
  Net sales (205,000-7,500)	197500
  Less: Estimated gross profit (197500*40%)	-79000
  Estimated cost of goods sold		-118500
  Estimated cost of inventory before theft		52,500
  Less: Stolen inventory		-10,500
  Estimated ending inventory		42,000

  2) Assuming markup on cost of 100%:
  Particulars	Amount ($)	Amount ($)
  Beginning inventory		59,000
  Plus: Net Purchases (115,000-6,500)		108500
  Freight-in		3,500
  Cost of goods available for sale		1,71,000
  Less: Cost of goods sold
  Net sales (205,000-7,500)	197500
  Less: Estimated gross profit (197500*100/200)	-98750
  Estimated cost of goods sold		-98750
  Estimated cost of inventory before theft		72,250
  Less: Stolen inventory		-10,500
  Estimated ending inventory		61,750

• why is the markup 0f 100% divided by 200 for the "less estimated gross profit"? In my version the markup is 60% what would I divide that by?

Answer 1

In case of mark up cost:

Cost + mark up = Sales

If we assume cost to be 100%

Then,

100% + 100% = Sales

Which means sales is 200% which includes 100% cost and 100% profit margin

Therefore Estimated gross profit will be = (Net Sales X 100%/200%)

In case when markup is 60%

Cost + mark up = Sales

If we assume cost to be 100%

Then,

100% + 60% = Sales

Therefore, Estimated gross profit will be = (Net Sales X 60%/160%)

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