Problem 2.

You have the following information for Divine Diamonds. The company uses the periodic method of accounting for its inventory transactions. Divine Diamonds only carries one brand and size of diamondsall are identical. Each batch of diamonds purchased is carefully coded and marked with its purchase cost.

March 1 Beginning inventory 150 diamonds at a cost of $300 per diamond. March 3 Purchased 200 diamonds at a cost of $350 each. March 10 Purchased 350 diamonds at a cost of $375 each. During the month, Devine Diamonds sold 500 diamonds for $650 each.

Problem 2: Instructions

(a) Assume that Divine Diamonds uses the specific identification cost flow method.

1. Demonstrate how Divine Diamonds could maximize its gross profit for the month by specifically selecting which diamonds to sell.

2. Demonstrate how Divine Diamonds could minimize its gross profit for the month by selecting which diamonds to sell.

(b) Assume that Devine Diamonds uses the FIFO cost flow assumption. Calculate cost of goods sold. How much gross profit would Devine Diamonds report under this cost flow assumption?

(c) Assume that Devine Diamonds uses the LIFO cost flow assumption. Calculate cost of goods sold. How much gross profit would the company report under this cost flow assumption?

(d) Assume that Devine Diamonds uses the weighted average cost flow assumption. Calculate cost of goods sold. How much gross profit would Devine Diamonds report under this cost flow assumption?

(e) Which cost flow method should Gold Nugget Gems select? Explain.