On April 24 of the current year, The Memphis Pecan Company experienced a tornado that destroyed...

Question:

On April 24 of the current year, The Memphis Pecan Company experienced a tornado that destroyed the company's entire inventory. At the beginning of April, the company reported a beginning inventory of $226,750. Inventory purchased during April (until the date of the tornado) was $197,800. Sales for the month of April through April 24 were $642,500. Assuming the company's typical gross profit ratio is 50%, estimate the amount of inventory destroyed in the tornado.

Gross profit:

Gross profit is computed by deducting the cost of goods sold from total sales. The gross profit for the period is the amount that will cover the operating expenses of the company. If the gross profit is higher than the operating expenses, the company will earn income, however, if the gross profit is lower than the operating expenses, the company will incur losses.

Answer and Explanation:

To determine the amount of ending inventory destroyed in the tornado, let us first compute for the cost of goods sold during the month:

  • Cost of goods sold = Sales for the month x ( 1 - Gross profit ratio)
  • Cost of goods sold = $642,500 x ( 1 - 50%)
  • Cost of goods sold = $642,500 x 50%
  • Cost of goods sold = $321,250

We can now determine the inventory balance that has been destroyed in the tornado:

  • Inventory destroyed in the tornado = Beginning inventory + Purchases - Cost of goods sold
  • Inventory destroyed in the tornado = $226,750 + $197,800 - $ 321,250
  • Inventory destroyed in the tornado = $103,300

Learn more about this topic:

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How to Calculate Gross Profit Margin: Definition & Formula

from Financial Accounting: Help and Review

Chapter 5 / Lesson 17
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