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Problem 9‐3

November 17, 2013 fire destroyed one section of warehouse
Marshmallow  Chocolate 
Fruit Toppings  Toppings Toppings
Inventory, January 1, 2013 $20,000 $7,000 $3,000
Net purchases through Nov. 17 150,000 36,000 12,000
Net sales through Nov. 17 200,000 55,000 20,000
Historical gross profit ratio 20% 30% 35%
Cost %
Cost % 80% 70% 65%

©Dr. Chula King
All Rights Reserved

Problem 9‐3 (continued)
Part 1:  Calculate the estimated cost of each of the toppings lost in the 
fire.
Fruit Marshmallow Chocolate
Beginning inventory $   20,000 $   7,000 $  3,000
Add:  Net Purchases 150,000 36,000 12,000
Goods Available $170,000 $43,000 $15,000
Less COGS
80% x 200,000 (160,000)
70% x 55,000 (38,500)
65% x 20,000 (13,000)
Estimated cost of loss $  10,000 $ 4,500 $ 2,000

©Dr. Chula King
All Rights Reserved

Problem 9‐3 (continued)
Part 2:  What factors could cause the estimates to be over‐or 
understated?
1. The historical gross profit percentages and thus the cost percentages 
are a main factor in the determination of the estimate.  If they are 
not representative of the current relationship between cost and 
selling price, then the resulting estimate would fail to be 
representative.
2 If the company failed to properly account such things as theft, sales 
2. If the company failed to properly account such things as theft sales
returns or spoilage in its inventory, then the estimate could fail to be 
representative.

©Dr. Chula King
All Rights Reserved