Question

The following accounting information pertains to Boardwalk Taffy and Beach Sweets. The only difference between the two companies is that Boardwalk Taffy uses FIFO, while Beach Sweets uses LIFO. Cash Accounts receivable Merchandise inventory Accounts payable Cost of goods sold Building Sales Boardwalk Taffy $ 85,000 330,000 240,000 245,000 1,224,000 300,000 2,100,000 Beach Sweets $ 35,000 330,000 178,000 245,000 1, 228, 200 300,000 2,100,000 Required a-1. Compute the gross margin percentage for each company. a-2. Identify the company that appears to be charging the higher prices in relation to its cost b-1. For each company, compute the inventory turnover ratio and the average days to sell inventory b-2. Identify the company that appears to be incurring the higher financing cost.

Answer 1

a-1.
	Gross margin [ ( Sales - Cost of goods sold ) / Sales ]
Boardwalk Taffy [ ( 2100000 - 1224000 ) / 2100000 ]	41.7%
Beach Sweets [ ( 2100000 - 1228200 ) / 2100000 ]	41.5%

a-2.
Higher prices	Boardwalk Taffy
Reason : As the gross margin of Boardwalk Taffy is higher than Beach Sweets, it charges the higher prices in relation to its cost.

b-1.
	Inventory Turnover ratios [ Cost of goods sold / Merchandise inventory ]		Average days [ Days in a year / Inventory turnover ]
Boardwalk Taffy	5.1	times	72	days
Beach Sweets	6.9	times	53	days

b-2.
Higher financing cost	Boardwalk Taffy
Reason : As the days in inventory of Boardwalk Taffy is higher than Beach Sweets, it has higher financing cost.