You have the following information for Prospector Gems. Prospector uses the periodic method of accounting for its inventory transactions. Prospector only carries one brand and size of diamonds—all 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 $310 per diamond.
March 3 Purchased 200 diamonds at a cost of $350 each.
March 5 Sold 180 diamonds for $600 each.
March 10 Purchased 330 diamonds at a cost of $375 each.
March 25 Sold 390 diamonds for $650 each.
Instructions
(a) Assume that Prospector Gems uses the specific identification cost flow method.
(1) Demonstrate how Prospector could maximize its gross profit for the month by specifically selecting which diamonds to sell on March 5 and March 25.
(2) Demonstrate how Prospector could minimize its gross profit for the month by selecting which diamonds to sell on March 5 and March 25.
(b) Assume that Prospector uses the FIFO cost flow assumption. Calculate cost of goods sold. How much gross profit would Prospector report under this cost flow assumption?
(c) Assume that Prospector 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) Which cost flow method should Prospector Gems select? Explain.