Question

A firm's inventory was destroyed by fire on August 14 of the current year. Fortunately, the firm had insurance to cover the loss. However, most of the inventory records were also destroyed in the fire. The average gross margin percentage is 40%, the beginning inventory was $200,000, and $1,000,000 of purchases had been made through August 13. The firm had recorded sales of $1,200,000 through that date.
Estimate the cost of the inventory lost in the fire.

Answer 1

Answer:

cost of the inventory lost is $600,000

Explanation:

The cost of goods sold is computed as follows

                                                            $

Opening stock                                    xxx

Add purchases during the year       xxx

Less closing stock                           (xxx)

Cost of goods sold                            xxx

Gross profit is the profit after deducting just the cost of goods sold only. The gross profit margin is the proportion of sales made as gross profit. It indicates how well a company is managaing its cost of inpust.

If a company has a gross profit margin of 30% then the balance figure of 70% of sales represents the value of cost of goods sold.

So we can apply this to our question

Cost of goods sold = (100-40)% × Sales

                                = 60% × $1,000,000

                                = $600,000

Now we can work out the cost of the inventory lost which is the closing inventory:

Remember

cost of goods sold = Opening inventory + purchases - closing inventory

600,000 = 200,000 + 1,000,000 - y               let y denotes closing inventory

y = 200,000 + 1,000,000 - 600,000

y = 600,000

cost of the inventory lost is $600,000