Gross profit method
Response to the following problem:
Smith Distributors, Inc., supplies ice cream shops with various toppings for making sundaes. On November 17, 2016, a fire resulted in the loss of all of the toppings stored in one section of the warehouse. The company must provide its insurance company with an estimate of the amount of inventory lost. The following information is available from the company's accounting records:
|
Fruit Toppings |
Marshmallow Toppings
|
Chocolate Toppings |
|
Inventory, January 1, 2016
|
$ 20,000
|
$ 7,000
|
$ 3,000
|
|
Net purchases through Nov. 17
|
150,000
|
36,000
|
12,000
|
|
Net sales through Nov 17
|
200,000
|
55,000
|
20,000
|
|
Historical gross profit ratio
|
20%
|
30%
|
35%
|
Required:
1. Calculate the estimated cost of each of the toppings lost in the fire.
2. What factors could cause the estimates to be over-or understated?