Inventory cost flow methods: LIFO liquidation; ratios
Response to the following problem:
Cast Iron Grills, Inc., manufactures premium gas barbecue grills. The company uses a periodic inventory system and the LIFO cost method for its grill inventory. Cast Iron's December 31, 2016, fiscal year-end inventory consisted of the following (listed in chronological order of acquisition):
Units Unit cost
5,000 $700
4,000 800
6,000 900
The replacement cost of the grills throughout 2017 was $1,000. Cast Iron sold 27,000 grills during 2017. The company's selling price is set at 200% of the current replacement cost.
Required:
1. Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2017 assuming that Cast Iron purchased 28,000 units during the year.
2. Repeat requirement 1 assuming that Cast Iron purchased only 15,000 units.
3. Why does the number of units purchased affect your answers to the above requirements?
4. Repeat requirements 1 and 2 assuming that Cast Iron uses the FIFO inventory cost method rather than the LIFO method.
5. Why does the number of units purchased have no effect on your answers to requirements 1 and 2 when the FIFO method is used?