Question

Royal Gorge Company uses the gross profit method to estimate ending inventory and cost of goods sold when preparing monthly financial statements required by its bank. Inventory on hand at the end of October was $59,000. The following information for the month of November was available from company records:
 

Purchases	$	115,000
Freight-in		3,500
Sales		205,000
Sales returns		10,000
Purchases returns		6,500

In addition, the controller is aware of $10,500 of inventory that was stolen during November from one of the company's warehouses.
 
Required:
1. Calculate the estimated inventory at the end of November, assuming a gross profit ratio of 40%.
2. Calculate the estimated inventory at the end of November, assuming a markup on cost of 60%.
 

Answer 1

Mark-up = 60% of cost

Set the cost of goods sold as = K

Gross profit = K x 60%

= 0.6K

Gross profit = net sales - cost of sales

0.6K = 195,000 - K

1.6K = 195,000

K = 195,000/1.6

= $121,875

Cost of sales = $121,875

Gross profit = net sales - cost of sales

= 195,000 - 121,875

= $73,125

Gross profit = $73,125