On the basis of the following data, what is the estimated cost of the inventory on May 31 using the retail method? Cost Retail

May 1 Inventory $125,000 $166,667
May 1-31 Purchases $235,000 313,333
May 1-31 Sales 230,000

a. $250,000
b. $187,500
c. $172,500
d. $360,000

b. $187,500

Explanation:

Using the retail method, we calculate the estimated cost of inventory on the 31st of May.

Calculation of retail value of the ending inventory                      Amount ($)

Retail price/value of the beginning inventory on May 1 (A)            166,667

Retail price/value of the goods purchased during May (B)             313,333  

Retail price/value of the goods available for sale  (C)                     480,000

(C) = (A) + (B)

Total sales during May  (D)                                                             230,000

Retail value of ending inventory  (E)                                              250,000

(E) = (C) - (D)

Now calculating the ratio of cost to the price ratio :

Here, F = cost of beginning inventory      = $125,000

         G = cost of inventory purchased     = $235,000

         H = retail value of beginning inventory  = $166,667

         I = retail value of goods purchased during the period = $313,333

The cost to retain ratio  

Now the estimated cost of the inventory on May 31st =  cost to retail price ratio x retail value of ending inventory

                                                                                       = 0.75 x 250,000

                                                                                       = $ 187,500

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