A company just starting business made the following four inventory purchases in June: 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

Question

A company just starting business made the following four inventory purchases in June:  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

Quizplus · Accepted Answer

Since the company just started business in June, it can be assumed that there were no beginning inventory balances. Therefore, the FIFO method would result in the highest gross profit as it assumes that the first units purchased are the first ones sold, and since the cost of inventory tends to increase over time, the older, cheaper units will be matched against revenue first, resulting in a higher gross profit. This can be seen by calculating the cost of goods sold under each method:

FIFO:
(100 units x $10) + (50 units x $12) + (75 units x $15) + (25 units x $18) = $2,250
Cost of goods sold per unit = $9
Gross profit = $5,500 - $2,250 = $3,250

LIFO:
(25 units x $18) + (75 units x $15) + (50 units x $12) + (100 units x $10) = $2,025
Cost of goods sold per unit = $8.10
Gross profit = $5,500 - $2,025 = $3,475

Weighted-average unit cost method:
[(100 units x $10) + (50 units x $12) + (75 units x $15) + (25 units x $18)] / 250 units = $13.20 per unit
Cost of goods sold = 250 units x $13.20 = $3,300
Gross profit = $5,500 - $3,300 = $2,200

Therefore, the FIFO method results in the highest gross profit of $3,250.

A Company Just Starting Business Made the Following Four Inventory