Requirement 1 determine the effect of the purchase of

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Requirement 1: Determine the effect of the purchase of the additional 20,000 units on the 2016 gross profit from the sale of the Zelenex and the payment due to Jim Lester.Purchase of the additional 20,000 units
Ethics Case 8-72/17/16Sales (35,000 Units @ $60) $2,100,000Cost of goods sold (20,000* $40)($800,000)(15,000*$30)($450,000)(1,250,000)Gross Profit$850,000Amount Payable to Jim Lester ($850,000 * 20%) = $170,000Purchase without the additional unitsSales (35,000 Units @ $60) $2,100,000Cost of goods sold (35,000 * $30)(1,050,000)Gross Profit$1,050,000Amount Payable to Jim Lester ($1,050,000 * 20%)= $210,000As shown above, if Moncrief was to purchase the additional 20,000 units at year-end, under the periodic LIFO inventory system. The transaction would decrease the amount due to Jim Lester. Not only would this reduce the amount of income tax to be paid to the government, but it would also reduce the amount of profits due to shareholders. By purchasing the additional 20,000 units of Zelenex, Moncrief reduces Jim Lester's payment by $40,000 ($210,000 – 170,000) and decreases gross profit by $200,000 ($1,050,000 – 850,000). The net effect on before-tax income is a decrease of $160,000 ($200,000 – 40,000). The net effect on before-tax income is a decrease of $160,000 ($200,000 – 40,000).

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