Final answer:
Under the Dollar-Value LIFO inventory method, a new inventory layer may be added when the inventory at base-year cost has increased. This is because an increase signifies a physical growth in inventory, after price level adjustments, warranting a new valuation layer. The correct option is 1) increased.
Step-by-step explanation:
Understanding the Dollar-Value LIFO (DVL) Method
Under the Dollar-Value LIFO (DVL) inventory method, a layer can only be added during the current year if inventory at base-year cost has increased. This increment allows for the addition of a layer priced at current year costs, which is then converted to base-year costs to maintain consistency in the inventory valuation over time.
The DVL method takes into account changes in price levels and inventory quantities. When the inventory at base-year cost has increased, this means that after adjusting for any changes in price levels, the physical quantity of inventory has grown. It is this increment in the physical quantity of inventory that justifies the addition of a new layer in the DVL inventory system.
If the inventory at base-year cost remains the same or decreases, no new layer is added, and the existing layers are used to value the end inventory at base-year costs. When comparing to options 2) decreased, 3) remained the same, and 4) fluctuated, the correct circumstance is when inventory at base-year cost has increased, which corresponds to option 1).