Q34PGB_6 - Horngren'S Financial And Managerial Accounting

Question

Steel It began January with 55 units of iron inventory that cost \(35 each. During January, the company completed the following inventory transactions:

 

Units Unit Cost Unit Sales Price

Jan. 3 Sale 45 \) 83

8 Purchase 75 $ 52

21 Sale 70 85

30 Purchase 10 55

 

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. 

Step1: Gross profit

Gross profit is the profit before operating expenses. It is the difference between the revenue and the direct expenses incurred. 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 the previous sub-section. The maximum gross profit comes under the FIFO method, $4,640. 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 higher if the COGS had been valued at lower prices.