In its first month of operation, Kuhlman Company purchased 130 units of inventory for $6, then 230 units for $7, and finally 170 units for $8. At the end of the month, 200 units remained.
Compute the amount of phantom profit that would result if the company used FIFO rather than LIFO.
under the fifo method
Unit sold 130*6+200*7= 2180
130 UNIT AT 6
200 UNIT AT 7
To compute the amount of phantom profit that would result if the company used FIFO (First-In-First-Out) instead of LIFO (Last-In-First-Out), we need to compare the cost of goods sold under the two different methods.
First, let's calculate the cost of goods sold using LIFO:
LIFO assumes that the most recent purchases are sold first, so we need to start with the most recent inventory purchases.
1. Calculate the cost of goods sold for the 200 units that remained at the end of the month:
- 170 units purchased at $8 = $1,360
- 30 units (out of the 230 units purchased at $7) = $210
Total cost of goods sold using LIFO = $1,360 + $210 = $1,570
Next, let's calculate the cost of goods sold using FIFO:
FIFO assumes that the earliest purchases are sold first, so we need to start with the oldest inventory purchases.
1. Calculate the cost of goods sold for the 200 units that remained at the end of the month:
- 130 units (out of the 130 units purchased at $6) = $780
- 70 units (out of the 230 units purchased at $7) = $490
Total cost of goods sold using FIFO = $780 + $490 = $1,270
Now, we can compare the cost of goods sold under LIFO and FIFO to determine the phantom profit.
Phantom Profit = Cost of Goods Sold (LIFO) - Cost of Goods Sold (FIFO)
Phantom Profit = $1,570 - $1,270
Phantom Profit = $300
Therefore, if the company uses FIFO instead of LIFO, there would be a phantom profit of $300.