Question

Muckenthaler Company sells product 2005WSC for $30 per unit. The cost of one unit of 2005WSC is $27, and the replacement cost is $26. The estimated cost to dispose of a unit is $3, and the normal profit is 40% of selling price. At what amount per unit should product 2005WSC be reported, applying lower-of-cost-or-market

Answer 1

Answer:

The product 2005WSC should be reported at $26 per unit.

Explanation:

The lower-of-cost-or-market (LCM) method is a method of recording the inventory of a company which requires that the inventory cost of the company must recorded at whichever is lower between the inventory's original cost or current market price.

Applying lower-of-cost-or-market, the amount per unit at whcih product 2005WSC should be reported can be determined as follows:

Net realizable value (NRV) = Selling price per unit - Cost of disposal per unit = $30 - $3 = $27

Replacement cost (RC) = $26

NRV - Profit Margin = $27 - ($30 * 40%) = $15

Cost per unit = $27

Note that the market is the middle value of Net realizable value (NRV), $27; Replacement cost (RC), $26; and "NRV - Profit Margin", $15. Since the Replacement cost (RC) of $26 is the middle value, that the market value.

Since the market value of $26 per unit is lower than Cost per unit of $27,  by applying lower-of-cost-or-market, the product 2005WSC should be reported at $26 per unit.