Determine the effect of the purchase of the additional units

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Reference no: EM132816314

In 2017, the Monarch Company purchased from Kim Langley the right to be the sole distributor in the western states of a product called Zuleflex in 2018. In payment, Monarch agreed to pay Langley 20% of the gross profit recognized from the sale of Zuleflex in 2018. Monarch uses a periodic inventory system and the LIFO inventory method.

Late in 2018, the following information is available concerning the inventory of Zuleflex:

Beginning inventory, 1/1/2018 (10,000 units @ $30) $300,000
Purchases (40,000 units @ $30) 1,200,000
Sales (35,000 units @ $60) 2,100,000

By the end of the year, the purchase price of Zuleflex had risen to $40 per unit. On December 28, 2018, three days before the year-end, Monarch is in a position to purchase 20,000 additional units of Zuleflex at the $40 per unit price. Due to the increase in the purchase price, Monarch will increase the selling price in 2019 to $80 per unit. Inventory on hand before the purchase, 15,000 units is sufficient to meet the next six months' sales and the company does not anticipate any significant changes in purchase price during 2019.

Required:

Problem 1. Determine the effect of the purchase of the additional 20,000 units on the 2018 gross profit from the sale of Zuleflex and the payment due to Kim Langley.

Problem 2. Discuss the ethical dilemma Monarch faces in determining whether or not the additional units should be purchased.

Reference no: EM132816314

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