Colicchio Corporation acquired two inventory items at a lump-sum cost of $60,000. The acquisition included 3,000 units of knife X001, and 3,000 units of knife X002. X001 normally sells for $20 per unit, and X002 for $10 per unit. If Colicchio sells 1,000 units of X002, what amount of gross profit should it recognize?

Explanation:

X001 Sales volum = 3000*$20 = $60,000

X002 Sales volum = 3000*$10 = $30,000

Total $90,000

Allocated to X002 based on sales volum is 33.33% (30,000/90,000) of the 60,000, which is $20,000

Cost per unit of X002 is $6.67 ($20,000/3,000). Sells 1000 units, $6.67*1000 = $6670.

Gross profit = Revenue $10,000 - Cost $6670 = $3330 in gross profit

$3,333

Explanation:

Using the maximum revenue achievable as cost allocation basis, we can then proceed as follows:

Knife X001 maximum achievable revenue = $20 × 3,000 = $60,000

Knife X001 achievable maximum revenue = $10 × 3,000 = $30,000

Total maximum achievable revenue = $60,000 + $30,000

Weight of Knife X001 = 60,000/90,000 = 0.67

Weight of Knife X002 = 30,000/90,000 = 0.33

Total cost allocated to Knife X001 = 0.67 × 60,000 = $40,000

Total cost allocated to Knife X002 = 0.33 × 60,000 = $30,000

Unit cost of Knife X001 = $40,000/3,000 = $13.33

Unit cost of Knife X002 = $20,000/3,000 = $6.67

Revenue from Knife X002 1,000 units sold = $10 × 1,000 = $10,000

Cost of Knife X002 1,000 units sold = $6.67 × 1,000 = $6,667

Gross profit from Knife X002 1,000 units sold = $10,000 - $10,000 – $6,667 = $3,333.

Therefore, amount of gross profit which Colicchio Corporation should recognize is $3,333 if 1,000 units of Knife X002 is sold.

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