Jermaine Dye Corporation acquired two inventory items at a lump-sum cost of $50,000.The acquisition included 3,000 units of product LF, and 7,000 units of product 1B.LF normally sells for $15 per unit, and 1B for $5 per unit.If Dye sells 1,000 units of LF, what amount of gross profit should it recognize?
A)$1,875
B)$5,625.
C)$10,000.
D)$11,875.

Question

Quizplus · Accepted Answer

We need to first determine the allocation of the cost of goods sold between the two products.

The total cost of the inventory is $50,000.

To allocate this cost, we can use the relative sales value method. This method allocates the cost based on the proportion of the sales value of each product to the total sales value of all products.

The total sales value of all products is:

(3,000 units of LF x $15 per unit) + (7,000 units of 1B x $5 per unit) = $105,000

The proportion of the sales value of LF to the total sales value of all products is:

(3,000 units of LF x $15 per unit) / $105,000 = 0.4286

The proportion of the sales value of 1B to the total sales value of all products is:

(7,000 units of 1B x $5 per unit) / $105,000 = 0.5714

Using these proportions, we can allocate the cost of the inventory:

- Cost of LF: $50,000 x 0.4286 = $21,430 
- Cost of 1B: $50,000 x 0.5714 = $28,570

Now, we can determine the gross profit from the sale of 1,000 units of LF:

- Revenue from 1,000 units of LF: 1,000 units x $15 per unit = $15,000 
- Cost of goods sold for 1,000 units of LF: 1,000 units x ($21,430 / 3,000 units) = $7,143.33 
- Gross profit from 1,000 units of LF: $15,000 - $7,143.33 = $7,856.67

Therefore, the amount of gross profit that Dye should recognize from the sale of 1,000 units of LF is $7,856.67, which is closest to answer choice B ($5,625).

Jermaine Dye Corporation Acquired Two Inventory Items at a Lump-Sum