Question

Muckenthaler Company sells product 2005WSC for $40 per unit. The cost of one unit of 2005WSC is $36, and the replacement cost is $35. The estimated cost to dispose of a unit is $8, and the normal profit is 40%. At what amount per unit should product 2005WSC be reported, applying lower-of-cost-or-market?

Answer 1

Applying the lower-of-cost-or-market rule, product 2005WSC should be reported at $32 per unit. This value is found by comparing the cost of $36 with the market value, which is the net realizable value of $32 after accounting for disposal costs.

Step-by-step explanation:

The question asks at what amount per unit should product 2005WSC be reported, applying lower-of-cost-or-market (LCM) accounting. To determine the value, consider cost, replacement cost, disposal costs, and normal profit margin. Cost per unit is $36, replacement cost is $35, and disposal costs are $8. The normal profit margin is 40% of the cost.

First, calculate the market value, considering that the lower of cost or market between replacement cost and net realizable value (NRV) should be used. NRV is computed by subtracting disposal costs from the selling price ($40 - $8 = $32). Since the replacement cost is $35, which is higher than the NRV of $32, use NRV for the market value.

Next, compare the cost ($36) with the market value ($32) and apply LCM by choosing the lower of the two, which is $32. Therefore, product 2005WSC should be reported at $32 per unit following LCM rules.