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Tan’s business has a gross margin of 40% on his sales. His opening inventory
was $60,900 and closing inventory was valued at $96,890. Included in the closing
inventory is some damaged goods which cost $9,800. These damaged goods can
only be sold for $7,000 if further repair work was carried out at a cost of $780. The
total sales is $1,400,000. What is the value of Tan’s purchases?I get this but I don’t know if its right .. please help
sales 1,400,000
Gross profit margin 1,400,000 X 100/60
COS 2,333,333Closing inventory 60900
less damaged goods (96890)
Add selling price 70000
Less repairs (780)
————
adj CI balance 93310
—————-Cos 2,333,333
add CI 93310
less OI (60900)
———
Purchases 2 487543
—————-I think i did COS wrong :
Sales 1400000
Cos 1400000x 60/100= 840000.. that’s it ?The question itself is a very poor one in that it does not say whether or not the inventory has been valued correctly.
The cost of sales is 60% x 1400000 = 840,000
The damaged goods should have been valued at the lower of cost and NRV. The cost is $9800. The NRV is 7000 – 780 = $6,220.
To calculate the purchases we need to know the cost of the inventory. Assuming that the damaged ones had been included at NVR, then the cost will have been 3580 higher (9800 – 6220). So the total cost of closing inventory is 96,890 + 3580 = 100,470.
So the purchases are 840,000 – 60,900 + 100,470 = 879,570
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