Megabôite Distributors Limited is reviewing its year-end inventory calculations. It uses the FIFO cost formula in a perpetual inventory system.

The company had $4.7 million of inventory at the beginning of the year and $5.5 million at the end of the year. During the year, it purchased $46.2 million of inventory.

The following items are unresolved and have not yet been reflected in the figures above:

1. Shipping logs show $1,850,000 of goods in transit to customers, shipped FOB shipping point.

2. Shipping logs show $1.6 million of goods in transit to customers, shipped FOB destination.

3. The showroom contains $450,000 of a supplier's customized products held on consignment.

4. Electronic equipment included in ending inventory is recorded at a cost of $350,000. The manufacturer has discontinued these models of equipment so their sales value has been greatly reduced. The net realizable value of this equipment is $150,000.

5. A new clerk in the wireless products department calculated FIFO incorrectly for some of the inventory. The ending inventory was determined to have a FIFO cost of $257,000 but it should have been $527,000.

Instructions

With the class divided into groups, do the following:

(a) Calculate the original (uncorrected) cost of goods sold for the year. Discuss each of the five unresolved items and determine the effect of each error on the reported cost of goods sold and ending inventory balances. Compare your corrected cost of goods sold and ending inventory figures with those of another group. Reconcile any differences.

(b) The industry's average inventory turnover is 10 times per year. Calculate Megabôite's inventory turnover (1) before any corrections, and (2) after the corrections you determined in (a). How does the corrected inventory turnover compare with the industry average?

(c) When you are reporting your results on inventory turnover to Megabôite's management team, the VP Sales states, "I don't care about inventory turnover numbers. As long as I meet my sales targets, we'll be profitable." Evaluate this statement. What is the relationship between inventory turnover and profit?