A Cost-Benefit Analysis
Village Hardware is a retail store selling hardware, small appliances, and sporting goods. The business follows a policy of selling all merchandise at exactly twice the amount of its cost to the store and uses a periodic inventory system.
At year-end. the following information is taken from the accounting records:
Net sales……………………….. | $580,000 |
Inventory, January 1…………… | 58,000 |
Purchases……………………….. | $297,250 |
A physical count indicates merchandise costing $49,300 is on hand at December 31.
Instructions
a. Prepare a partial income statement showing computation of the gross profit for the year.
b. On seeing your income statement, the owner of the store makes the following comment: “Inventory shrinkage losses are really costing me. If it weren’t for shrinkage losses, the store’s gross profit would be 50 percent of net sales. I’m going to hire a security guard and put an end to shoplifting once and for all.”
Determine the amount of loss from inventory shrinkage stated (1) at cost and (2) at retail sales value. (Hint: Without any shrinkage losses, the cost of goods sold and the amount of gross profit would each amount to 50 percent of net sales.)
c. Assume that Village Hardware could virtually eliminate shoplifting by hiring a security guard at a cost of $ 1,800 per month. Would this strategy be profitable? Explain your reasoning.
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