In the context of Cost of Goods Sold, what is a major focus for a company employing a low-cost business strategy under either the perpetual or periodic inventory system?

• A. Maximizing inventory levels to ensure product availability
• B. Increasing selling prices to improve profit margins
• C. Minimizing the cost of goods sold to maximize gross profit
• D. Focusing on high-cost, premium inventory items

Answer: (C)

Verified step by step guidance

1. Understand the concept of Cost of Goods Sold (COGS): COGS represents the direct costs attributable to the production of goods sold by a company, including materials and labor. It is a critical component in calculating gross profit, which is revenue minus COGS.
2. Recognize the goal of a low-cost business strategy: Companies employing this strategy aim to minimize costs in order to offer competitive pricing and maximize gross profit. This involves reducing production costs, procurement costs, and other expenses related to inventory.
3. Analyze the inventory system used: Whether the company uses a perpetual inventory system (tracking inventory in real-time) or a periodic inventory system (updating inventory at intervals), the focus remains on minimizing COGS. This can be achieved by sourcing low-cost materials, optimizing production processes, and reducing waste.
4. Evaluate the impact on gross profit: Lowering COGS directly increases gross profit, as gross profit is calculated using the formula: $\mathrm{Gross}\mathrm{Profit}=\mathrm{Revenue}-\mathrm{COGS}$. A low-cost strategy ensures that the company retains more profit from each sale.
5. Avoid focusing on high-cost, premium inventory items: A low-cost business strategy typically avoids premium inventory items, as these can increase COGS and reduce gross profit margins. Instead, the focus is on cost-effective inventory management and efficient operations.