Question

A company just starting business made the following four inventory purchases in June: June 1 150 units $ 390 June 10 200 units 585 June 15 200 units 630 June 28 150 units 510 $2,115 A physical count of merchandise inventory on June 30 reveals that there are 250 units on hand. The inventory method which results in the highest gross profit for June is

Answer 1

Answer:

FIFO will result in the highest gross profit for June.

Explanation:

June 1      150 units  $390

June 10    200 units $585

June 15    200 units $630

June 28   150 units  $510  

Total        700 units  $2,115

Sold Units = 700 units - 250 units = 450 units

FIFO Inventory valuation method requires that the Inventory which is purchased first should be sold first and inventory Purchased at last should be sold at last.

COGS under FIFO = ( $390 + $585 + (100 x $630/200) ) = $1,290

In LIFO the unit purchased at the last will be sold first. The earlier purchases will remain in the inventory. In this inventory system the cost of goods sold is based on the recent prices of the product.

COGS under LIFO = ( $510 + $630 + (100 x $585/200) ) = $1,432.5

Weighted Average unit cost the average cost of units on hand on each day. It is calculated by dividing total inventory value by total available units.

COGS under weighted average cost of inventory = 450 x ( $2,115 / 700 ) = $1,359.6

As we know if the COGS is higher the GP will be lower and vice versa.

So the lowest COGS will give the highest GP.

FIFO gives the lowest COGS of $1,290, so this method will result in the highest gross profit for June.