Which cost flow method should Bernelli Diamonds select? Explain.

You have the following information for Bernelli Diamonds. Bernelli Diamonds uses the periodic method of accounting for its inventory transactions. Bernelli only carries one brand and size of diamonds—all are identical. Each batch of diamonds purchased is carefully coded and marked with its purchase cost.

March 1 Beginning inventory 150 diamonds at a cost of $300 per diamond.

March 3 Purchased 200 diamonds at a cost of $350 each.

March 5 Sold 180 diamonds for $600 each.

March 10 Purchased 350 diamonds at a cost of $375 each.

March 25 Sold 400 diamonds for $650 each.

Instructions

(a) Assume that Bernelli Diamonds uses the specific identification cost flow method.

(1) Demonstrate how Bernelli Diamonds could maximize its gross profit for the month by specifically selecting which diamonds to sell on March 5 and March 25.

(2) Demonstrate how Bernelli Diamonds could minimize its gross profit for the month by selecting which diamonds to sell on March 5 and March 25.

(b) Assume that Bernelli Diamonds uses the FIFO cost flow assumption. Calculate cost of goods sold. How much gross profit would Bernelli Diamonds report under this cost flow assumption?

(c) Assume that Bernelli Diamonds uses the LIFO cost flow assumption. Calculate cost of goods sold. How much gross profit would the company report under this cost flow assumption?

(d) Which cost flow method should Bernelli Diamonds select? Explain.

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