Inventory Methods
You have another brilliant idea that you want to propose to your boss. You want to sell t-shirts on the company intranet site to employees to make more money.
The t-shirts can be purchased by employees for themselves, family members, suppliers, or customers. You will sell the t-shirts for $25 each. Your boss agrees with your idea and tells you to proceed.
To proceed, you need to find a vendor that can supply you with the t-shirts and build up your inventory.
On 2/1/xxxx you found a vendor that can supply you with t-shirts for $5 each and you purchase 500 t-shirts.
Unfortunately, the vendor you have been working with suddenly went out of business and you must quickly find another vendor.
With some success, you do find another vendor however, the cost to you is $15 per t-shirt and you decide to purchase 1,000 t-shirts and you place this order on 2/15/xxxx.
Once again, the second vendor goes out of business and you must find yet another vendor. You another, but things are getting worse. The vendor knows you need the inventory and are desperate.
The new vendor decides to charge you $20 per t-shirt. You are getting in orders so you have an idea of what your sales should be, and you have no choice but to purchase 1,100 t-shirts from this vendor at $20 per t-shirt.
To summarize, here are your inventory purchases:
Date # of Units Cost per Unit
2/1/xxxx 500 $5.00
2/15/xxxx 1,000 $15.00
3/1/xxxx 1,100 $20.00
Now that you have stocked up on inventory, sales begin coming in.
Your sales activity for April, May, and June are as follows:
Month # of Sales
April 700
May 800
June 1,000
Working with the attached Excel spreadsheet, you are to determine which inventory methodology would be better to use based on the gross profit. LIFO has been prepared for you.
You must calculate FIFO. Then you will compare LIFO against FIFO and determine which methodology you would recommend.
Excel Worksheet: M8 – LIFO and FIFO.xlsx Download M8 – LIFO and FIFO.xlsx
Once you have made a decision, you are to submit a memo to your boss and include the following:
Introduction
Recap the idea
Explain that you are preparing this memo to differentiate the gross profit based on an inventory methodology.
LIFO
Define LIFO.
Why would some industries use LIFO over FIFO?
What are the advantages and disadvantages of LIFO?
What are the results using the LIFO inventory methodology?
FIFO
Define FIFO.
Why would some industries use FIFO over LIFO?
What are the advantages and disadvantages of FIFO?
What are the results using the FIFO inventory methodology?
Conclusion
What is your recommendation to your boss based on your calculations? The memo can be 1 – 2 pages (or more if you feel the need).
Memo Template: Memo Template.docx
SUBMIT
M8- LIFO and FIFO Excel File
Memo – Written Paper