(Determining the amount of inventory on hand when a periodic inventory system is used, LO 1,7) On February 19, 2004 Exploits Inc.’s (Exploits) entire inventory was stolen in a daring daylight robbery. The thieves held warehouse personnel at gunpoint while they methodically loaded trucks with the contents of the warehouse.

There were no injuries.

Exploits is fully insured against theft and so must file a claim with its insurance company for the loss suffered. Because Exploits uses a periodic inventory system, it does not know for certain the amount of inventory that was stolen. However, from your discussions with company personnel you have learned that Exploits has two categories of inventory. Category one inventory usually generates a gross margin of 60%, while the category two usually generates a gross margin of 35%. Sales of cate- gory one since the company’s year end on October 31, 2003 were about $850,000. Sales of category two over the same time period were about $1,755,000. During the period since the year end, Exploits purchased $325,000 of category one inventory and $800,000 of category two inventory. The financial records show that on October 31, 2003 there was $450,000 of category one inventory and $1,000,000 of category two inventory on hand:

Required:

Prepare a report to Exploits’ management that computes the amount of the loss that should be claimed from the insurance company as a result of the robbery. Explain any factors that management should be aware of that would change the amount of the claim.