The following accounting information pertains to Phoenix Co. and Roswell Co. companies at the end of 2017. The only difference between the two companies is that Phoenix Co. uses FIFO while Roswell Co. uses LIFO.

The following accounting information pertains to Phoenix Co. and Roswell Co. companies at the end of 2017. The only difference between the two companies is that Phoenix Co. uses FIFO while Roswell Co. uses LIFO.

 

	Phoenix Co.			Roswell Co.
Cash	$	80,000		$	80,000
Accounts receivable		330,000			330,000
Merchandise inventory		245,000			218,000
Accounts payable		210,000			210,000
Cost of goods sold		1,127,000			1,504,200
Building		300,000			300,000
Sales		1,900,000			1,900,000

Required
a-1.	Compute the gross margin percentage for each company.

Explanation:

a-1.

First the company's gross margins must be calculated:

   

	Phoenix			Roswell
Sales	$	1,900,000		$	1,900,000
Cost of goods sold		(1,127,000	)		(1,504,200	)
Gross margin	$	773,000		$	395,800

 

Gross margin %:

Phoenix: $773,000 ÷ $1,900,000 = 40.7%

Roswell: $395,800 ÷ $1,900,000 = 20.8%

a-2.

Phoenix appears to be charging more in relation to cost of goods sold.

b-1.

Inventory turnover ratios:

Phoenix: $1,127,000 ÷ $245,000 = 4.6 times

Roswell: $1,504,200 ÷ $218,000 = 6.9 times

Average days to sell inventory:

Phoenix: 365 days ÷ 4.6 = 79 days

Roswell: 365 days ÷ 6.9 = 53 days

b-2.

Phoenix appears to incur the higher costs to finance inventory because it takes a longer time to sell its inventory.

Thank you!