Mac's Hardware's gross profit on sales is 40%. At the beginning of January, cost of inventory was $18,000. During one month, Mac had net purchases of $42,000. Net sales at retail for the month were $49,000. The estimated cost of ending inventory using the gross profit method is:
A)$30,600
B)$29,400
C)$60,000
D)$42,000
E)None of these

Question

Quizplus · Accepted Answer

The gross profit method estimates the cost of ending inventory by first determining the cost of goods sold (COGS). With a gross profit on sales of 40%, the cost percentage is 60% (100% - 40%). Net sales were $49,000, so the estimated COGS is 60% of $49,000, which is $29,400. The beginning inventory was $18,000, and net purchases were $42,000, making the goods available for sale $60,000 ($18,000 + $42,000). Subtracting the estimated COGS ($29,400) from the goods available for sale ($60,000) gives the estimated cost of ending inventory as $30,600.

Mac's Hardware's Gross Profit on Sales Is 40