Question

a1 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 a1 use when applying the lower of cost or market (lcm) rule to ending inventory?

Answer 1

According to the lower of cost or market rule, A1 Electronics should use $18 as the unit value for its ending inventory, which represents the replacement cost that is lower than the cost per unit.

Step-by-step explanation:

The student's question relates to which unit value A1 Electronics should use when applying the lower of cost or market (LCM) rule to ending inventory. The cost per unit is $20, the replacement cost is $18, the selling price is $30, and the selling costs are $4.

Considering the normal profit margin is 30% of the selling price, which is $9 ($30 * 30%), we can determine the market value to be the replacement cost since it needs to be lower than the ceiling (selling price minus selling costs, which is $26) and higher than the floor (selling price minus selling costs minus normal profit, which is $17).

Therefore, according to the LCM rule, the inventory should be valued at $18 per unit, which is the replacement cost, as it is lower than the cost per unit.