![]() LIFO method profit: $6.50 per unit ($20 price less $13.50 cost).FIFO method profit: $10 per unit ($20 price less $10 cost).The 400 candles sold on December 25th generate a different amount of profit, depending on the inventory valuation method you choose: To illustrate, let’s assume that Seaside Candles have a market value of $20 per unit. The inventory cost method has an impact on profit in the income statement. Your business can use several valuation methods. Another factor is the dollar value placed on each unit of ending inventory. The inventory example above computes ending inventory in units. Use net purchases in the ending inventory formula. ![]() ![]() Net purchases are the items purchased after subtracting returns or damaged goods. If the retailer wants 2,000 bats (10% of expected sales) in ending inventory, the number of bats purchased should be:Ģ0,000 projected sales + 2,000 ending inventory – 7,000 beginning inventory = 15,000 purchased Estimate your sales for the month, and use the ending inventory formula to plan your purchasesĪssume, for example, that a sporting goods retailer has a beginning inventory of baseball bats totaling 7,000 units, and the store forecasts 20,000 bat sales for the month. If you get customer orders during the first few days of the next month, you’ll be able to fill the orders. The amount might be based on a percentage of monthly sales. To use the formula, decide on a dollar amount of ending inventory that you can keep on hand at month-end.
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