Sunshine supplies ice cream shops with different toppings for ice cream sundaes. On November 17, 2007, a fire in Redbird’s warehouse damaged all of the toppings stored in that section. Sunshine should provide its insurance company with the estimate of the amount of inventory lost. The information given below is available from company’s accounting records:
Fruit Toppings Marshmallow Toppings Chocolate Toppings
Inventory, January 1, 2007 $20,000 $7,000 $3,000
Net purchases through Nov 17 150,000 36,000 12,000
Net sales through Nov 17 200,000 55,000 20,000
Historical gross profit rates 20% 30% 35%
1) Compute the estimated cost of each of toppings lost in a fire.
2) prepare down the factors that could cause estimates to be over- or understated?