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In its first month of operation, Whispering Winds Corp. purchased 180 units of inventory for $7, then 280 units for $8, and finally 220 units for $9. At the end of the month, 260 units remained. Compute the amount of phantom profit that would result if the company used FIFO rather than LIFO.

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facundobuzzetti

Answer:

If the company uses FIFO, the gross profit will increase by $400.

Explanation:

Giving the following information:

purchases:

180 units of inventory for $7

280 units for $8

220 units for $9

Ending inventory= 260 units

First, we need to calculate the number of units sold:

Units sold= total units - ending inventory

Units sold= 680 - 260= 420 units

The difference between the gross profit under the two methods is the cost of goods sold. For LIFO we use the cost of the lasts units incorporated into inventory. For FIFO, the cost of the firsts units incorporated into inventory.

LIFO:

COGS= 220*9 + 200*8= $3,580

FIFO:

COGS= 180*7 + 240*8= $3,180

Difference= 3,580 - 3,180= $400

If the company uses FIFO, the gross profit will increase by $400.

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