Question

Convex Mechanical Supplies produces a product with the following costs as of July 1, 20X1:

Material	$5
Labor	3
Overhead	2
	$10

  

Beginning inventory at these costs on July 1 was 7,900 units. From July 1 to December 1, Convex produced 20,000 units. These units had a material cost of $7 per unit. The costs for labor and overhead were the same. Convex uses FIFO inventory accounting.

a. Assuming that Convex sold 22,000 units during the last six months of the year at $14 each, what would gross profit be?
  

b. What is the value of ending inventory?

Answer 1

As per First in first out (FIFO) method, the units sold are from the earliest purchases.

(a) Units sold = 22000

The cost of 22000 units sold is as below:

Firts 7900 units from beginning inventory @10 per unit = $79000

Remaining 14100 (i.e. 22000 - 7900) units will be sold from purchases @ 12 per unit (i.e. $7 + $3 + $2) = $169200

Total cost of goods sold = $79000 + $169200 = $248200

Sales = 22000 * $14 = $308000

Now,

Gross profit = Sales - Cost of good sold

Gross profit = $308000 - $248200 = $59800

(b) Ending inventory will be the units left from purchases as per below:

Units remaining = 20000 - 14100 = 5900

These 5900 units will be @ 12 per unit.

So, ending inventory = 5900 * $12 = $70800