Question

Sports Inc. uses the FIFO cost formula in a perpetual inventory system. (Use unrounded numbers in your calculations but round your final answer to the nearest cent) Jun 1 Jun 5 Jun 8 Jun 9 Jun 10 Jun 22 Beginning inventory Purchase Sale Purchase Sale Sale 20 units @ $19.00 per unit 100 units @ $22.00 per unit 70 units 80 units @ 22.31 per unit 25 units 40 units If Sports Inc. was using the average cost formula instead of FIFO, gross profit from the June 8 sale would be Ohigher. the same. Olower. cannot be determined. none of the above.

Answer 1

Answer

· Average Cost per unit on Jun 8
= (20 x $ 19) + (100 x $ 22) / (20 + 100 units)
= 2580 / 120
= $ 21.5 per unit

· Cost of Goods Sold as per Average cost on June 8 = 70 units x $ 21.5 = $ 1505

· Cost of Goods Sold as per FIFO on June 8 = (20 units x $ 19) + (50 units x $ 22) = $ 1480

· Cost of Goods Sold is HIGHER in Average Cost.
This means that Gross Profit under Average Cost would be LOWER.

· Correct Answer = Option #3: LOWER