Avanti purchases inventory from overseas and incurs the following costs: the merchandise cost is $50,000, credit terms 2/10, n/30 that apply only to the $50,000; FOB shipping point freight charges are $1,500; insurance during transit is $500; and import duties are $1,000. Avanti paid within the discount period and incurred additional costs of $1,200 for advertising and $5,000 for sales commissions. Compute the cost that should be assigned to the inventory.

Question

Quizplus · Accepted Answer

The cost that should be assigned to the inventory includes the merchandise cost plus any other costs incurred to get the inventory to the company's location.

Merchandise cost: $50,000

FOB shipping point freight charges: $1,500

Insurance during transit: $500

Import duties: $1,000

Additional costs: $1,200 (advertising) + $5,000 (sales commissions) = $6,200

Total cost = $50,000 + $1,500 + $500 + $1,000 + $6,200 = $52,200

However, since Avanti paid within the discount period, they get a 2% discount on the merchandise cost only ($50,000).

2% of $50,000 = $1,000

So the cost that should be assigned to the inventory is:

$50,000 + $1,500 + $500 + $1,000 + $6,200 - $1,000 = $52,200 - $1,000 = $51,200

Rounded to the nearest hundred, the answer is $52,000.

Avanti Purchases Inventory from Overseas and Incurs the Following Costs