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In its first month of operation, Sheffield Corp. purchased 230 units of inventory for $9, then 330 units for $10, and finally 270 units for $11. At the end of the month, 310 units remained. Compute the amount of phantom profit that would result if the company used FIFO rather than LIFO.

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Answer:

If the company uses FIFO, the gross income will increase by $500.

Explanation:

Giving the following information:

Purchases:

230 units of inventory for $9

330 units for $10

270 units for $11

At the end of the month, 310 units remained.

The difference in gross profit is in the cost of goods sold. First, we will determine the number of units sold:

Units sold= total units - ending inventory

Units sold= 830 - 310

Units sold= 520

The FIFO method uses the cost of the firsts units incorporated into inventory. The LIFO method uses the cost of the lasts units incorporated into inventory.

FIFO:

COGS= 230*9 + 290*10= $4,970

LIFO:

COGS= 270*11 + 250*10= $5,470

Difference= 5,470 - 4,970= $500

If the company uses FIFO, the gross income will increase by $500.

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