Ross Electronics has one product in its ending inventory. Per
unit data consist of the following: cost, $20; replacement cost,
$18; selling price, $30; selling costs, $4. The normal profit is
30% of selling price.
What unit value should Ross use when applying the lower of cost or
market (LCM) rule to ending inventory?
Solution:Unit Value of ending inventory = $ 18
Calculation of lower of cost or market
Product |
Replacement Cost |
Net Realizable Value [Note] |
NRV-Profit [Note] |
Market Value [Note] |
Original Cost |
Lower of Cost or Market |
1 |
$ 18.00 |
$ 26.00 |
$ 17.00 |
$ 18.00 |
$ 20.00 |
$ 18.00 |
Note:
· NRV = Selling price-Selling costs = 30-4 = $26
· NRV - NP = 26 - (30*30%) = $17
· To calculate market value an easy method is used in this question. We will take the middle value of the given below values to ascertain market value.
Replacement value |
NRV |
NRV minus Normal Profits |
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