Using the information below, calculate gross profit for the period:
Beginning Raw Materials Inventory: $22,000
Ending Raw Materials Inventory: $27,000
Beginning Work in Process Inventory: $49,000
Ending Work in Process Inventory: $58,000
Beginning Finished Goods Inventory: $74,000
Ending Finished Goods Inventory: $61,000
Cost of Goods Sold for the period: $510,000
Sales revenues for the period: $1,194,000
Operating expenses for the period: $202,000
The Correct Answer and Explanation is:
Correct Answer:
Gross Profit = Sales Revenues – Cost of Goods Sold
Gross Profit = \$1,194,000 – \$510,000 = \$684,000
Detailed Explanation (300+ words):
Gross profit is a fundamental financial metric that measures a company’s profitability before operating expenses are taken into account. It represents the profit a company makes after deducting the cost of goods sold (COGS) from its total sales revenues. This measure is crucial because it tells us how efficiently a business is producing and selling its goods.
The formula to calculate Gross Profit is:
Gross Profit = Sales Revenues – Cost of Goods Sold (COGS)
From the data provided:
- Sales Revenues = \$1,194,000
- Cost of Goods Sold (COGS) = \$510,000
Using the formula:
Gross Profit = \$1,194,000 – \$510,000 = \$684,000
It’s important to understand what COGS includes. COGS represents all direct costs tied to the production of goods that were sold during the period. This typically includes raw materials, direct labor, and manufacturing overhead costs. However, in this problem, the COGS is already given as \$510,000, so we don’t need to compute it from raw materials or inventory changes.
The additional inventory data given (raw materials, work in process, finished goods) might be relevant if you were asked to calculate COGS, but since COGS is directly provided, we focus only on the formula above for gross profit.
It’s also worth distinguishing Gross Profit from Operating Profit (which would subtract operating expenses from gross profit) and Net Income (which subtracts interest, taxes, and other expenses). In this case, the Operating Expenses of \$202,000 are not needed for the gross profit calculation, but they would be used if calculating net or operating income.
Conclusion:
The gross profit for the period is \$684,000, showing how much revenue remains after covering the cost to produce the goods sold. This figure helps assess how efficiently the company is managing its production and pricing strategies.