On August 31, a hurricane destroyed a retail location of Vinny's Clothier including the entire inventory on hand at the location. The inventory on hand as of June 30 totaled $960,000. Since June 30 until the time of the hurricane, the company made purchases of $255,000 and had sales of $750,000. Assuming the rate of gross profit to selling price is 40%, what is the approximate value of the inventory that was destroyed?
A) $960,000.
B) $544,500.
C) $615,000.
D) $765,000.

Question

Quizplus · Accepted Answer

To calculate the approximate value of the inventory destroyed, we need to first calculate the cost of goods sold from June 30 until the time of the hurricane:

Cost of goods sold = Beginning inventory + Purchases - Ending inventory
Cost of goods sold = $960,000 + $255,000 - Ending inventory

We don't know the ending inventory, but we can use the gross profit rate to approximate it:

Gross profit rate = Gross profit / Selling price
0.40 = Gross profit / 1
Gross profit = 0.40

Using this rate, we can approximate the ending inventory as follows:

Ending inventory = Sales / (1 + Gross profit rate) - Cost of goods sold
Ending inventory = $750,000 / (1 + 0.40) - ($960,000 + $255,000)
Ending inventory = $750,000 / 1.40 - $1,215,000
Ending inventory = $107,142.86

Finally, the approximate value of the inventory that was destroyed is simply the ending inventory:

Approximate value of inventory destroyed = $107,142.86

Therefore, the best choice is D) $765,000.

On August 31, a Hurricane Destroyed a Retail Location of Vinny's