Question

Steel Mill began August with 50 units of iron inventory that cost \(35 each. During August, the company completed the following inventory transactions:

Units Unit Cost Unit Sales Price

Aug. 3 Sale 45 \) 85

8 Purchase 90 $ 54

21 Sale 85 88

30 Purchase 15 58

Requirements

6. If the business wanted to maximize gross profit, which method would it select?

Short answer

Under the FIFO method, the gross profit would be highest.

Step-by-step solution

Step-by-Step SolutionStep 1: Gross profit

Gross profit is the difference between the revenue generated by the sales and all the direct expenses incurred for making that sale. The direct expense includes material costs and labor costs.

Maximum gross profit

The gross profit under all the given methods has been computed in sub-question 5. The maximum gross profit comes under the FIFO method, which is $5,235. This is so because the COGS has been computed for the older prices against the higher current market costs.

Thus, the gross profit would be lower if the COGS has been valued at lower prices.