Question

Herman Company has three products in its ending inventory. Specific per unit data at the end of the year for each of the products are as follows:Product 1 Product 2 Product 3Cost $ 20 $ 90 $ 50Replacement cost 18 85 40Selling price 40 120 70Selling costs 6 40 10Normal profit margin 5 30 12Required:What unit values should Herman use for each of its products when applying the lower of cost or market (LCM) rule to ending inventory

Answer 1

Answer:

Explanation:

In this question, we apply the lower of cost or market (LCM) rule which is shown below:

For Product 1

The Cost is $20

And, the market value = Selling price - selling cost - normal profit margin

                                     = $40 - $6 - $5

                                     = $29

So, the lower value would be $20

For Product 2

The Cost is $90

And, the market value = Selling price - selling cost

                                     = $120 - $40

                                     = $80

So, the lower value would be $80

For Product 3

The Cost is $50

And, the market value = Selling price - selling cost - normal profit margin

                                     = $70 - $10 - $12

                                     = $48

So, the lower value would be $48

In the product 2, the replacement cost is 85 and the market value without considering the normal profit margin is $80 which is less than the replacement cost that's why we do not take the normal profit margin