To estimate the cost of the inventory lost using the gross profit method, you need to calculate the gross profit and apply it to the sales amount.
Step 1: Calculate the cost of goods sold (COGS):
COGS = Beginning Inventory + Purchases - Ending Inventory
Given:
Beginning Inventory = $100,000
Purchases = $600,000
Sales = $1,000,000
We need to calculate the Ending Inventory to determine the COGS.
Ending Inventory = Beginning Inventory + Purchases - COGS (which is unknown)
Step 2: Calculate the Gross Profit:
Gross Profit = Sales - COGS
Step 3: Identify Lisa's normal gross profit percentage:
Lisa's normal gross profit percentage = 40%
Now, let's calculate:
COGS = Beginning Inventory + Purchases - Ending Inventory
COGS = $100,000 + $600,000 - Ending Inventory
Gross Profit = Sales - COGS
40% of Sales = Sales - COGS
Substituting the values:
0.40 * $1,000,000 = $1,000,000 - COGS
Simplifying the equation:
COGS = $1,000,000 - (0.40 * $1,000,000)
COGS = $1,000,000 - $400,000
COGS = $600,000
Now, let's substitute the COGS value back into the equation to find the Ending Inventory:
$600,000 = $100,000 + $600,000 - Ending Inventory
Simplifying the equation and isolating the Ending Inventory:
$600,000 - $100,000 - $600,000 = - Ending Inventory
-$100,000 = - Ending Inventory
The minus signs cancel out:
$100,000 = Ending Inventory
Therefore, the estimated cost of inventory lost in the fire using the gross profit method is $100,000.