Chapter 5B, Problem 1YT

Suppose Base Company began May with inventory of $2,000 and purchased $8,000 worth of inventory during the first half of May. Sales for the first half of May amounted to $12,000. Then, a fire destroyed the remaining inventory. Base Company has had a gross profit ratio of approximately 30% for the first four months of the year. Approximately how much inventory did Base Company lose in the fire?

To determine

Compute the amount of inventory that Company B loses in the fire accident.

Explanation of Solution

Given information:

Inventory at Beginning of Month May is $2,000, Inventory purchased during the first half of the month is $8,000, and sales during the first half of the month are $12,000.

Gross profit percentage is 30% and the remaining inventories are destroyed in the fire which means the ending inventory destroyed in fire.

$\begin{array}{c}\text{Ending inventory = Beginning inventory + Purchases – Cost of goods sold}\\ =\$2,000+\$8,000–\left[\$12,000\times \left(1-30\%\right)\right]\\ =\$10,000–\left[\$12,000\times 70\%\right]\\ =\$1,600\end{array}$ 

Therefore, the inventory destroyed in fire is $1,600.