Phantom profit

Question

In its first month of operation, Kuhlman Company purchased 180 units of inventory for $5, then 280 units for $6, and finally 220 units for $7. At the end of the month, 240 units remained.
Compute the amount of phantom profit that would result if the company used FIFO rather than LIFO.


I am really not sure how to figure this one out. Can someone walk me through it?

Thanks,
Shawna

Answer 1

One way to look at this situation is as follows:

Day 1 purchase of 180 units @ $5/u = $900

Day 2 purchase of 280 units @ $6/u = $1680

Day 3 purchase of 220 units @ $7/u = $1540

 

Summing the columns, we get 680 units with a value of $4120

 

At the end of the month, there were 240 units in stock, which means that

680 units - 240 units = 440 units sold

 

with the FIFO system, we would have used all of the inventory from Day 1 (180 units @ $5/u = $900) leaving 260 units (440 units sold - 180 units from Day 1) to be taken from Day 2 inventory.

 

The value of the Day 2 inventory was 260 units @ $6/u = $1560.

The total cost with the FIFO system would have been $2460.

 

With the LIFO system, all of the Day 3 inventory would have been used (220 units @ $7/u = $1540) leaving 220 units to be taken from Day 2 inventory.

 

The value of Day 2 inventory was 220 units @ $6/u = $1320, and the total cost with the LIFO system would have been $2860.

 

When we subtract LIFO - FIFO, we get $2860 - 2460 = $400

 

So, the phantom profit was $400