Question

Data related to the inventories of Kimzey Medical Supply are presented below:

	Surgical				Surgical				Rehab				Rehab
	Equipment				Supplies				Equipment				Supplies
Selling price	$	335			$	195			$	415			$	240
Cost		245				165				325				237
Replacement cost		315				155				310				233
Costs to sell		60				20				40				40
Normal gross profit ratio		30	%			30	%			30	%			20	%

In applying the lower of cost or market rule, the inventory of surgical supplies would be valued at:

Multiple Choice

a. $175.

b. $165.

c. $155.

d. $135.

Answer 1

Answer is C) $155

Valued as

Upper Limit or ceiling  = NRV = $195-$20 = $175

Gross Profit on sale = 30% of $195 = $58.5

Lower limit or Floor = NRV less Normal Profit = $175-$58.5 = $116.50

Replacement Cost = $155

Market value = Middle of Upper limit, lower limit and replacement cost = $155

Cost = $165

Applying rule of lower of market value = $155 and Cost = $155

So Surgical equipment will be valued = $155

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