Question

Saddlery Company sells leather saddles and equipment for horse enthusiasts. Saddlery uses the perpetual inventory system. The following schedule relates to the company’s inventory for the month of May:

						Cost		Sales
May 1		Beginning inventory		150 units		$82,500
5		Sale		100 units				$71,500
9		Purchase		50 units		$30,250
13		Purchase		200 units		$132,000
24		Sale		200 units				$154,000
27		Sale		50 units				$44,000
30		Purchase		75 units		$54,450

A) Calculate Saddlery Company’s cost of goods sold, gross margin, and ending inventory using FIFO.

B) Calculate Saddlery Company’s cost of goods sold, gross margin, and ending inventory using weighted-average. (Round calculations for cost per unit to 2 decimal places, e.g. 10.52 and final answers to 0 decimal places, e.g. 61,052.)

C) What is the gross margin ratio for each method?

Answer 1

A FIFO METHOD

cost of goods sold = (100 × 550) + (50×550) + ( 50 × 605 ) + (100 ×660)+(50×660) = 211750

Gross margin = sales - cost of goods sold

Sales = 71500 + 154000 + 44000 = 269600

Gross margin = 269600 - 211750 = 57850

Ending inventory = (50×660)+(75×726) = 87450

B WEIGHTED AVERAGE METHOD

In weighted average method we use average price

Cost of goods sold = (100×550) + (200×632.5) + (50×632.5) = 213125

Gross margin = 269600 - 213125 = 56475

Ending inventory = 125 × 688.6 = 86075

C Gross margin ratio = (gross margin / sales) × 100

IN FIFO METHOD

Gross margin ratio = (57850 / 269600) × 100 = 21.45%

IN WEIGHTED AVERAGE METHOD

Gross margin ratio = (56475/269600) × 100 = 20.94%

The above are the detailed calculations and equations