Question

Nathan’s Grills, Inc., imports and sells premium-quality gas grills. The company had the following layers in its LIFO inventory at January 1, 2014, at which time the replacement cost of the inventory was $900 per unit.

Year LIFO Layer Added                   Units                     Unit Cost

    2011                                                  100                         $600

    2012                                                  50                           700

    2013                                                  30                           800

The replacement cost of grills remained constant throughout 2014. Nathan’s sold 200 units during 2014. The company established the selling price of each unit by doubling its replacement cost at the time of sale.

Calculate gross margin percentage assuming 1) purchases of 220 in 2014 and 2) purchases of 110 in 2014. Nathan’s uses a periodic inventory system.

Answer 1

1. Purchases 220, Sales 200 : All sales units are from Current year Purchases as LIFO is used.

Gross margin = Sales revenue - cost of goods sold

= (900*2) x 200 - 900 x 200 = $180,000

Percentage of Gross Margin = Gross Margin / Sales revenue

= $180,000 / $360,000 = 50%

2. Purchases 110, Sales 200 : As LIFO is used, out of 200 units of Sales, 110 are from Current Purchases, 30 from 2013, 50 from 2012 and 10 from 2011.

Gross margin = Sales revenue - cost of goods sold

= (900*2) x 200 - 900 x 110 - 800 x 30 - 700 x 50 – 600 x 10 = $196,000

Percentage of Gross Margin = Gross Margin / Sales revenue

= $196,000 / $360,000 = 54.44%