Q29PGA_6 - Horngren'S Financial And Managerial Accounting

Question

Steel Mill began August with 50 units of iron inventory that cost \(35 each. During August, the company completed the following inventory transactions:

                                                  Units                Unit Cost               Unit Sales Price

Aug. 3            Sale                      45                                                            \) 85

8                     Purchase              90                      $ 54

21                   Sale                       85                                                              88

30                   Purchase              15                          58

 

Requirements

6. If the business wanted to maximize gross profit, which method would it select?

Step-by-Step Solution

Answer

Under the FIFO method, the gross profit would be highest. 

Step-by-Step Solution Step 1: Gross profit

Gross profit is the difference between the revenue generated by the sales and all the direct expenses incurred for making that sale. The direct expense includes material costs and labor costs. 

Step 2: Maximum gross profit

The gross profit under all the given methods has been computed in sub-question 5. The maximum gross profit comes under the FIFO method, which is $5,235.  This is so because the COGS has been computed for the older prices against the higher current market costs.

Thus, the gross profit would be lower if the COGS has been valued at lower prices.