Question

Rose industries had 400 units of product ab in their inventory, costing $12 each. 600 more units of product ab were purchased for $18 each. rose industries eventually sold 700 units for $30 each. by what amount did the lifo liquidation overstate normal gross profit?
a.$ -0-
b.$1,200
c.$1,800
d.$ 600

Answer 1

The company in here is forced to sale their older inventory because of the demand of 700 units while the inventory that last entered their warehouse was only 600 units. Since they are following the LIFO method of inventory, LIFO liquidation will take place and the normal gross profit will differ than the actual profit. The sales for Rose Industries would be $21,000 (700 units x $30). The COGS should have been $12,600 (700 units x $18) following the normal sale of inventory giving the normal gross profit as $8,400 ($21,000 - $12,600). But since the demand is higher than the inventory that was last purchased, the company needs to sell 100 units of product ab that costs $12. Therefore, the COGS would be $12,000 [(600 units x $18) + (100 units x $12). Therefore the actual gross profit is $9,000 which is $600 higher than the normal gross profit.