Tim Legler requires an estimate of the cost of goods lost by fire on March 9. Me

Question

Tim Legler requires an estimate of the cost of goods lost by fire on March 9. Merchandise on hand on January 1 was $38,280. Purchases since January 1 were $93,030; freight-in, $4,800; purchase returns and allowances, $2,800. Sales are made at 33 1/3% above cost and totaled $127,800 to March 9. Goods costing $12,360 were left undamaged by the fire; remaining goods were destroyed.

(a) Compute the cost of goods destroyed. $________

(b) Compute the cost of goods destroyed, assuming that the gross profit is 33 1/3% of sales. (Round ratios for computational purposes to 5 decimal places, e.g. 78.72345% and final answer to 0 decimal places, e.g. 28,987.) Cost of goods destroyed $________

Explanation / Answer

To calculate the cost of goods destoyed by fire, the 1st step is to calculate the cost of goods available for sale.

Cost of goods available = opening balance+purchases+freight in - returns and allowances

= 38280+93030+4800-2800 = $133,310

This is the amount of goods available for sale as on March 9.

Value of sales = 127,800. Sales = 33.33% above cost. Thus sales = 1+33.33% of cost = 1.3333 * cost

Thus, 1.3333 * cost = 127,800

or cost = 127,800/1.3333 = $95,850.

Goods left in inventory = goods available for sale - cost of goods sold

= 133310 - 95850 = $37,460.

Now of this, $12,360 worth of goods were left undamaged.

Goods destroyed = goods in inventory - goods left undamaged

= 37460 - 12360 = $25,100

b. Now if gross profit = 33.33 % of sales.

Sales = 127,800.

gross profit = 33.33% of 127,800 = 42,599.99996

Thus cost = sales - gross profit

= 127800-42,599.99996

= $85,200.00004

Goods left in inventory = goods available for sale - cost of goods sold

133310 - 85,200.00004 = $48,109.99996

Now of this, $12,360 worth of goods were left undamaged.

Goods destroyed = goods in inventory - goods left undamaged

$48,109.99996 - 12360 = $35,749.99996

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