7.49 (Whitimore Corporation; effect of FIFO and LIFO on gross margin over several periods.)

a. Gross

Year Revenue – Cost of Goods Sold = Margin

5 3,600 X $15.00 = $ 54,000 3,600 X $10 = $ 36,000 $ 18,000

6 8,000 X $18.00 = 144,000 (400 X $10) + (7,600 X $12)

= 95,200 48,800

7 5,500 X $16.50 = 90,750 (1,400 X $12) + (4,100 X

$11) = 61,900 28,850

8 10,000 X $15.00 = 150,000 (1,900 X $11) + (8,100 X

$10) = 101,900 48,100

b. Gross

Year Revenue – Cost of Goods Sold = Income

5 3,600 X $15.00 = $ 54,000 3,600 X $10 = $ 36,000 $ 18,000

6 8,000 X $18.00 = 144,000 8,000 X $12 = $ 96,000 48,000

7 5,500 X $16.50 = 90,750 5,500 X $11 = $ 60,500 30,250 8 10,000 X $15.00 = 150,000 (9,000 X $10) + (500 X $11)

+ (500 X $12) = $101,500 48,500

c. Change in

Gross Margin Change in

FIFO LIFO Sales

Year 6: [($48,800/$18,000) – 1] +171.1%

[($48,000/$18,000) – 1] +166.7%

[($144,000/$54,000) – 1] +166.7%

Year 7: [($28,850/$48,800) – 1] –40.9%

[($30,250/$48,000) – 1] –37.0%

[($90,750/$144,000) – 1] –37.0%

Year 8: [($48,100/$28,850) – 1] +66.7%

[($48,500/$30,250) – 1] +60.3%

[($150,000/$90,750) – 1] +65.3%

d. Whitimore Corporation consistently sets selling prices at 50 percent above replacement costs. Because LIFO uses more current acquisition costs to measure cost of goods sold than FIFO, LIFO’s gross margin changes tend to track changes in sales. FIFO uses older acquisition costs to measure cost of goods sold. The gross margin under FIFO each period includes a larger realized holding gain or holding loss than LIFO, resulting in greater fluctuations in reported earnings. An exception to the generalization that LIFO tends to result in smother changes in gross margin each year than FIFO may occur when a LIFO firm dips into an old LIFO layer. Whitimore Corporation dipped into its LIFO layers during Year 8 but, in this case, its percentage change in the gross margin under LIFO is still less than under FIFO.

Harcourt, Inc. 7-XXX Solutions