Question

Tim Legler requires an estimate of the cost of goods lost by fire on March 9. Merchandise on hand on January 1 was \(38,000. Purchases since January 1 were \)72,000; freight-in, \(3,400; purchase returns and allowances, \)2,400. Sales are made at 331 /3% above cost and totaled \(100,000 to March 9. Goods costing \)10,900 were left undamaged by the fire; remaining goods were destroyed. Instructions (a) Compute the cost of goods destroyed. (b) Compute the cost of goods destroyed, assuming that the gross profit is 331 /3% of sales.

Short answer

(a) Cost of goods destroyed equals $25,100.

(b) Cost of goods destroyed equals $33,433.33.

Step-by-step solution

Calculation of gross profit on sales

Gross profit on sales is calculated as follows:

$\begin{array}{rcl}\mathrm{Gross}\mathrm{profit}\mathrm{percentage}\mathrm{on}\mathrm{sales}& =& \frac{\mathrm{Percentage}\mathrm{markup}\mathrm{on}\mathrm{costs}}{100\%+\mathrm{Percentage}\mathrm{markup}\mathrm{on}\mathrm{costs}}\\ & =& \frac{33{\displaystyle \frac{1}{3}}\%}{100\%+33{\displaystyle \frac{1}{3}}\%}\\ & =& 25\%\end{array}$

Calculation of cost of goods sold

Cost of goods sold is calculated as follows:

$\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}& =& \mathrm{Sales}\mathrm{revenue}\times \left(1-\mathrm{Gross}\mathrm{profit}\right)\\ & =& \$100,000\times \left(1-25\%\right)\\ & =& \$75,000\end{array}$

Calculation of goods destroyed

(a) Calculation of cost of goods destroyed is calculated as follows:

$\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{destroyed}& =& \mathrm{Beginning}\mathrm{inventory}+\left(\mathrm{Purchases}-\mathrm{Purchase}\mathrm{return}+\mathrm{Freight}\mathrm{in}\right)-\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}-\mathrm{Undamaged}\mathrm{goods}\\ & =& \$38,000+\left(\$72,000-\$2,400+\$3,400\right)-\$75,000-\$10,900\\ & =& \$25,100\end{array}$

Calculation of cost of goods sold

Cost of goods sold is calculated as follows:

$\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}& =& \mathrm{Sales}\mathrm{revenue}\times \left(1-\mathrm{Gross}\mathrm{profit}\mathrm{percentage}\right)\\ & =& \$100,000\times \left(1-33\frac{1}{3}\%\right)\\ & =& \$66,666.67\end{array}$

Calculation of goods destroyed

(a) Calculation of cost of goods destroyed is calculated as follows:

$\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{destroyed}& =& \mathrm{Beginning}\mathrm{inventory}+\left(\mathrm{Purchases}-\mathrm{Purchase}\mathrm{return}+\mathrm{Freight}\mathrm{in}\right)-\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}-\mathrm{Undamaged}\mathrm{goods}\\ & =& \$38,000+\left(\$72,000-\$2,400+\$3,400\right)-\$66,666.67-\$10,900\\ & =& \$33,433.33\end{array}$

Thus, cost of goods destroyed in case (a) equals $25,100, and in case (b) equals $33,433.33.