Question

Data related to the inventories of Kimzey Medical Supply are presented below: Surgical Surgical Rehab Rehab Equipment Supplies Equipment Supplies Selling price $ 325 $ 185 $ 405 $ 230 Cost 235 155 315 227 Replacement cost 305 145 300 223 Costs to sell 56 18 38 36 Normal gross profit ratio 20 % 20 % 20 % 30 % In applying the lower of cost or market rule, the inventory of surgical equipment would be valued at:

Answer 1

Answer:

The inventory of surgical equipment would be valued at $204.

Explanation:

The data given in the question are first sorted as follows:

                                               Surgical      Surgical      Rehab          Rehab

                                             Equipment   Supplies   Equipment   Supplies

Selling price                             $ 325        $ 185            $ 405         $ 230

Cost                                             235           155                 315            227

Replacement cost                      305           145                 300           223

Costs to sell                                  56             18                   38              36

Normal gross profit ratio          20 %         20 %              20 %           30 %

The value of the inventory of surgical equipment can now be calculated as follows:

Ceiling = Net realizable value = Selling price - Costs to sell = $325 - $56 = $269

Floor = Net realizable value - Normal gross profit ratio = $269 - (325 * 20%) = $204

Replacement cost = $305

Market is the middle value of ceiling, floor and replacement cost.

Market value = Flor $204

Cost = $235

Lower of cost or market = $204

Therefore, the inventory of surgical equipment would be valued at $204.