Homework #3 Solution
Question 1
a. Cost of inventory purchased during 2012: $3,600,000 / 5,000 units = $720/unit
(don’t include selling commissions in inventory cost)
COGS = (5,000 x $720) + (1,000 x $400) = $4,000,000
b. Units available for sale = 5,000 (BI) + 5,000 (purchased) = 10,000
Units in EI = 10,000 - 6,000 (sold) = 4,000
EI = 4,000 x $720 = $2,880,000
Question 2
a. 2012 Index = EI at current prices
EI at base year prices
2012 Index = (450 x $3) + (1,200 x $6) = $8,550
(450 x $2) + (1,200 x $5) = $6,900
2012 Index = 1.24
b. Layer added in 2012 = 6,900 - 5,100 = $1,800
EI = 5,100 + (1,800 x 1.24) = $7,332
Question 3
a. 12/31/11 LIFO Reserve = 3,420,000 - 3,020,000 = 400,000
Cumulative difference between FIFO and LIFO = 400,000 x .40 = 160,000
$160,000 LESS tax paid since adoption of LIFO
b. 2011 COGS Effect = Change in LIFO Reserve during the current year
2011 COGS Effect = 400,000 - 450,000 = (50,000)
2011 pre-tax Income is $50,000 HIGHER because LIFO is used
c. Average tax benefit per year = 160,000 / 4 years = 40,000/year
Average cost of LIFO per year = 40,000 x (1 - .40) = 24,000/year
Assumptions:
 Tax benefits stay the same or increase in the future. This is a reasonable assumption because the average annual benefit is likely understated due to the 2004 LIFO liquidation and inventory prices and quantities are expected to increase in the foreseeable future.
 Incremental costs associated with LIFO stay the same or decrease in the future.
 Incremental costs are tax deductible

Question 4
a.

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