Costs of sales and inventory under alternative cost-?ow assumptions
Naiad distributes equipment for yachts and small boats. It decides to stock the EauK, a new type of desalinator that uses the boat's own motion through the sea to operate the device. The following table shows the company's purchases of EauK units in the second quarter of x4.
|
April
|
5
|
at A2,340 each
|
|
May
|
5
|
at A2,100
|
|
June
|
6
|
at A2,050
|
Naiad sells 12 EauK units in this quarter. It calculates the cost of sales on a periodic basis at the end of the quarter.
Required
(a) Compute the costs of second quarter sales and of units in inventory at end-June x4, under FIFO, WAC and LIFO cost-flow assumptions.
(b) Assume the company uses the WAC cost-flow assumption. A consultant urges Naiad to purchase additional units of the desalinator before the end of the second quarter. He argues that the extra purchases will reduce the risk of stock-outs in the busy third quarter and, in addition, will increase second quarter profits.
Recalculate WAC cost of sales in the second quarter, assuming the company buys an extra four units of EauK in late June at a unit price of A2,050 (making purchases of 10 units in the month). Why is cost of sales lower than under the WAC case in (a)? Is the company better off purchasing the additional four units at end-quarter 2?