7A-3. Beginning inventory for SQUISHY PLUM Company for February was S43,000. Dur

Question

7A-3. Beginning inventory for SQUISHY PLUM Company for February was S43,000. During the next three weeks SQUISHY purchased more plums for S28,000. They also generated sales revenue of $82,000 during these three weeks through the sale of plums. Unfortunately for SQUISHY their refrigeration suddenly went out one evening, turning their inventory into a soupy glop that was thrown away. SQUISHY wants to file an insurance claim for the cost of the lost inventory but they need to estimate the value of ending inventory immediately prior to the disaster. In the past SQUISHY has hada gross margin percentage of 65%. Please estimate the value of ending inventory using the gross margin method.

Explanation / Answer

Sales revenue = $82,000

Gross margin = 65% = Gross Profit / Net sales

Gross Profit = 65%*82000 = 53,300

Cost of goods sold = Sales - Gross Profit = 82,000 - 53,300 = 28,700

Ending inventory = Opening inventory + Purchases - cost of goods sold = 43,000 + 28,000 - 28,700 = $42,300

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