Question

Marr Corporation has two products in its ending inventory, each accounted for at the

lower-of-cost-or-market. A profit margin of 30% on selling price is considered normal
for each product. Specific data with respect to each product follows:
Product #1 Product #2
Historical cost $40.00 $ 70.00
Replacement cost 45.00 54.00
Estimated cost to dispose 10.00 26.00
Estimated selling price 80.00 130.00

In pricing its ending inventory using the lower-of-cost-or-market, what unit values
should Marr use for products #1 and #2, respectively?

Answer 1

Marr should use unit values of $45.00 for Product #1 and $104.00 for Product #2 when pricing its ending inventory using the lower-of-cost-or-market.

Step-by-step explanation:

In the lower-of-cost-or-market (LCM) rule, the cost of inventory should be compared to the market value, and the lower of the two should be used as the valuation.

The market value is defined as the replacement cost, but not to exceed the net realizable value (selling price less estimated cost to dispose).

For each product, compare the historical cost, replacement cost, and the net realizable value (selling price - estimated cost to dispose). The lower of cost or market should be chosen.

For Product #1:

1. Historical cost = $40.00

2. Replacement cost = $45.00

3. Net realizable value (selling price - estimated cost to dispose) = $80.00 - $10.00 = $70.00

In this case, the replacement cost is lower than the net realizable value, so the unit value for Product #1 should be $45.00.

For Product #2:

1. Historical cost = $70.00

2. Replacement cost = $54.00

3. Net realizable value (selling price - estimated cost to dispose) = $130.00 - $26.00 = $104.00

In this case, the net realizable value is lower than the replacement cost, so the unit value for Product #2 should be $104.00.

Therefore, Marr should use unit values of $45.00 for Product #1 and $104.00 for Product #2 when pricing its ending inventory using the lower-of-cost-or-market.