Echo Sound Company just began business and made the following four inventory purchases in June: June 1 150 units $ 780 June 10 200 units 1,170 June 15 200 units 1,260 June 28 150 units 990 $4,200 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. The inventory method which results in the highest gross profit for June is:

a. the FIFO method

b. the LIFO method

c. the average cost method

d. not determinable

The correct answer is A.

Explanation:

Giving the following information:

June 1: $780/150 units = $5.2 per unit

June 10: $1,170/200 units = $5.85 per unit

June 15: $1,260/200 = $6.3 per unit

June 28: $990/150 = $6.6 per units

A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand.

Units sold = total units - ending inventory

Units sold = (150 + 200 + 200 + 150) - 210 = 490 units

The method with the lowest cost of goods sold will have the highest income:

FIFO (first-in, first-out):

COGS = 150*5.2 + 200*5.85 + 140*6.3 = $2,832

LIFO / last-in, first-out)

COGS = 150*6.6 + 200*6.3 + 140*5.85 = $3,069

Weighted-average:

Weighted-average price = (5.2 + 5.85 + 6.3 + 6.6) / 4 = 5.99

COGS = 490*5.99 = $2,935.1

The inventory method that will provide the highest gross profit is FIFO.