Question

You have the following information for Windsor, Inc., Windsor, Inc. uses the periodic method of accounting for its inventory transactions. Windsor, Inc. 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 155 diamonds at a cost of $328 per diamond. March 3 Purchased 193 diamonds at a cost of $344 each. March 5 Sold 175 diamonds for $607 each. March 10 Purchased 361 diamonds at a cost of $353 each. March 25 Sold 406 diamonds for $642 each. Assume that Windsor, Inc. uses the specific identification cost flow method. (1) Demonstrate how Windsor, Inc. 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, Windsor, Inc. should sell the diamonds with the cost. (2) Demonstrate how Windsor, Inc. could minimize its gross profit for the month by selecting which diamonds to sell on March 5 and March 25. To minimize gross profit, Windsor, Inc. should sell the diamonds with the cost. Assume that Windsor, Inc. uses the FIFO cost flow assumption. Calculate cost of goods sold. How much gross profit would the company report under this cost flow assumption? Cost of goods sold $ Gross profit $ Assume that Windsor Inc. uses the LIFO cost flow assumption. Calculate cost of goods sold. How much gross profit would the company report under this cost flow assumption? Cost of goods sold $ Gross profit $

Answer 1

Answer 1
In order to maximise the gross profit for the month , Windsor should sell the diamonds with the lower purchase cost first.
The maximisation of profit is demonstrated as under,
	Units	Rate per unit	Total
Sales
- On March 5	175	$607	$106,225
- On March 25	406	$642	$260,652
Total Sales	581		$366,877
Cost of Purchase for March 5 Sale
- Beginning Inventory	155	$328	$50,840
- Purchased on March 3	20	$344	$6,880
Cost of Purchase for March 25 Sale
- Purchased on March 3	173	$344	$59,512
- Purchased on March 10	233	$353	$82,249
Total Cost of Goods sold	581		$199,481
Gross Profit			$167,396
Answer 2
In order to minimise the gross profit for the month , Windsor should sell the diamonds with the higher purchase cost first.
The minimization of profit is demonstrated as under,
	Units	Rate per unit	Total
Sales
- On March 5	175	$607	$106,225
- On March 25	406	$642	$260,652
Total Sales	581		$366,877
Cost of Purchase for March 5 Sale
- Purchased on March 3	175	$344	$60,200
Cost of Purchase for March 25 Sale
- Purchased on March 10	361	$353	$127,433
- Purchased on March 3	18	$344	$6,192
- Beginning Inventory	27	$328	$8,856
Total Cost of Goods sold	581		$202,681
Gross Profit			$164,196
Answer 3
Calculation of cost of goods sold and gross profit under FIFO cost flow assumption
	Units	Rate per unit	Total
Sales
- On March 5	175	$607	$106,225
- On March 25	406	$642	$260,652
Total Sales	581		$366,877
Cost of Purchase for March 5 Sale
- Beginning Inventory	155	$328	$50,840
- Purchased on March 3	20	$344	$6,880
Cost of Purchase for March 25 Sale
- Purchased on March 3	173	$344	$59,512
- Purchased on March 10	233	$353	$82,249
Total Cost of Goods sold	581		$199,481
Gross Profit under FIFO			$167,396
Answer 4
Calculation of cost of goods sold and gross profit under LIFO cost flow assumption
	Units	Rate per unit	Total
Sales
- On March 5	175	$607	$106,225
- On March 25	406	$642	$260,652
Total Sales	581		$366,877
Cost of Purchase for March 5 Sale
- Purchased on March 3	175	$344	$60,200
Cost of Purchase for March 25 Sale
- Purchased on March 10	361	$353	$127,433
- Purchased on March 3	18	$344	$6,192
- Beginning Inventory	27	$328	$8,856
Total Cost of Goods sold	581		$202,681
Gross Profit under LIFO			$164,196