Question

Smith company sold inventory that cost $5,000 for $9,000 cash. Freight cost was $600 paid in cash. The freight terms were FOB shipping point. Based on this information,

a. net income would be $3,400.

b. gross margin would be $4,000.

c. gross margin would be $3,400.

d. None of the answers are correct.

Answer 1

Answer:

b. gross margin would be $4,000.

Explanation:

Distribution costs are considered when calculating gross margin.

Gross margin is given by sales subtracted by the cost of goods sold:

$GM = \ 9,000-\ 5,000=\ 4,000$

The gross margin would be $4,000.

Although the freight cost should be included when calculating net income, more administrative costs could be added and, thus, net income cannot be determined with the given information.