Coastal Shores Inc. (CSI) was completely destroyed by Hurricane Fred on August 5, 2009. At January 1, CSI reported an inventory of $170,000. Sales from January 1, 2009, to August 5, 2009, totaled $480,000 and purchases totaled $195,000 during that time. CSI consistently marks up its products 60% over cost to arrive at a selling price. The estimated inventory loss due to Hurricane Fred would be:
A)$131,175.
B)$ 65,000.
C)$ 17,143.
D)None of these is correct.

Question

Quizplus · Accepted Answer

To find the cost of goods sold, we need to subtract the beginning inventory from the sum of purchases and ending inventory. Since we do not have information about the ending inventory, we can estimate it using the gross profit percentage (markup as a percentage of cost).

Markup as a percentage of cost = (selling price - cost) / cost = 60% 
Markup as a percentage of selling price = 60% / (100% + 60%) = 37.5%

Therefore, the estimated cost of goods sold is: 
Sales / (1 + markup %) = $480,000 / (1 + 37.5%) = $348,837.21

The estimated cost of the lost inventory is: 
Beginning inventory + purchases - cost of goods sold = $170,000 + $195,000 - $348,837.21 = $16,162.79

However, we also need to consider the markup when estimating the value of the lost inventory: 
Estimated value of lost inventory = cost of lost inventory / (1 - markup %) = $16,162.79 / (1 - 60%) = $40,406.98

Therefore, the answer is B) $65,000 (rounded to the nearest thousand).