Question

Indigo Outdoor Stores Inc. uses a perpetual inventory system and has a beginning inventory, as at April 1, of 152 tents. This consists of 50 tents at a cost of $212 each and 102 tents at a cost of $226 each. During April, the company had the following purchases and sales of tents:

Purchases   Sales
Date       Units       Unit Cost       Units       Unit Price  
Apr.   3                       75       $409  
10       194       $273                  
17                       238       409  
24       295       292                  
30                       205       409  

Determine the cost of goods sold and the cost of the ending inventory using FIFO.

Cost of goods sold		$
Cost of the ending inventory		$

Calculate Indigo Outdoors’s gross profit and gross profit margin for the month of April. (Round gross profit margin to 1 decimal place, e.g. 1.2 and gross profit to the nearest whole dollar, e.g. 5,275.)

Gross profit		$
Gross profit margin			%

Is the gross profit determined in part (b) higher or lower than it would be if Indigo Outdoors had used the average cost formula?

The gross profit is higher/lower  than if the average cost formula had been used in a perpetual inventory system because cost of goods sold is lower/higher under FIFO in a period of falling/rising prices than it would be using the average cost formula. Under FIFO, ending inventory is lower/higher, cost of goods sold is higher/lower and gross profit is higher/lower.

Answer 1

Answer to Requirement 1:

Goods Purchased Cost of Goods Sold Inventory Balance Cost per Cost per Cost per Cost of Inventory Date #of units #of units #of units unit unit Goods Sold unit Balance 10600 Apr. 01 50 212.00 23052 102 226.00 212.00 Apr. 03 50 10600 0 212.00 0 226.00 5650 25 77 226.00 17402 Apr. 10 194 273.00 77 226.00 17402 194 273.00 52962 Apr. 17 226.00 77 17402 0 226.00 0 273.00 161 43953 33 273.00 9009 Apr. 24 295 292.00 33 273.00 9009 86140 295 292.00 9009 Apr. 30 33 273.00 0 273.00 0 292.00 172 50224 123 292.00 35916 Total 136838 518 123 35916

Cost of Goods Sold = $136,838
Cost of Ending Inventory = $35,916

Answer to Requirement 2:

Sales Revenue = 75 * $409.00 + 238 * $409.00 + 205 * $409.00
Sales Revenue = $211,862

Gross Profit = Sales Revenue - Cost of Goods Sold
Gross Profit = $211,862 - $136,838
Gross Profit = $75,024

Gross Profit Margin = Gross Profit / Sales Revenue
Gross Profit Margin = $75,024 / $211,862
Gross Profit Margin = 0.354 or 35.4%

Answer to Requirement 3:

The gross profit is higher than if the average cost formula had been used in a perpetual inventory system because cost of goods sold is lower under FIFO in a period of rising prices than it would be using the average cost formula. Under FIFO, ending inventory is higher, cost of goods sold is lower and gross profit is higher.