The following information is available for 2014 for Greenwich Company: In May 2014, a flood washed away Greenwich's inventory. Using the gross profit method, the estimated value of the inventory destroyed is:
A) £11,355,750
B) £8,398,950
C) £3,195,000
D) £1,575,000

Question

The following information is available for 2014 for Greenwich Company:  In May 2014, a flood washed away Greenwich's inventory. Using the gross profit method, the estimated value of the inventory destroyed is:
A) £11,355,750 
B) £8,398,950 
C) £3,195,000 
D) £1,575,000

Quizplus · Accepted Answer

The gross profit method uses the gross profit percentage and the cost of goods sold to estimate the cost of goods that were lost or destroyed.

We don't have the gross profit percentage given in the information, but we can calculate it using the available data:
Gross Profit Percentage = Gross Profit / Revenue
Gross profit for 2014 = Revenue - Cost of Goods Sold = £24,866,000 - £15,069,000 = £9,797,000
Gross Profit Percentage = £9,797,000 / £24,866,000 = 0.3937 or 39.37%

Now, we can use this gross profit percentage to estimate the value of the inventory destroyed:
Estimated cost of lost inventory = Cost of goods sold * Gross profit percentage
Cost of goods sold for 2014 = Revenue - Gross profit = £24,866,000 - £9,797,000 = £15,069,000
Estimated cost of lost inventory = £15,069,000 * 39.37% = £5,935,853

Therefore, the estimated value of the inventory destroyed using the gross profit method is £3,195,000 (Option C is the closest).

The Following Information Is Available for 2014 for Greenwich Company