business math inventory using gross profit method

Question

over the past three years, the gross profit rate for jini company was 35%. last week a fire destroyed all of jini's inventory. using the gross profit method, estimate the cost of inventory destroyed in the fire given the following facts that were recorded in a fireproof safe: beginning inventory $6,000, net purchases $64,000, net sale at retail $49,000

Answer 1

We know that profit = sales - cost.  Adding cost to both sides and subtracting profits from both sides, we have

 

cost = sales - profit

Also the gross profit rate tells us that profit/sales = 0.35. Multiplying both sides by sales, we have

 

profit = 0.35 * sales

 

So, we started with $6,000 worth of goods, and purchased another $64,000 worth for a total of $70,000.  We sold some, but we're not sure yet what the cost of that was.  We'll need to figure out the cost of what we sold at retail.

 

We know that sales = $49,000.

Cost = sales - profit = $49,000 - profit.

 

We know that

profit = 0.35 * sales = 0.35 * $49,000 = $17,150

 

So

cost = sales - profit

       = $49,000 - $17,150

       = $31,850

 

Well, we started with $70,000 worth of goods and sold $31,850.  Everything else was destroyed in the fire.  So we lost

 

$70,000 - $31,850 = $38,150

 

I hope that helps.

 

Regards,

Mike N.