Question

Nelson Corporation sells three different products. The following information is available on December 31.

Inventory item Units Cost per unit Market value per unit
X 150 $4.00 $3.50
Y 300 $2.00 $1.50
Z 750 $3.00 $4.00

When applying the lower-of-cost-or-market rule to each item, what will Nelson's total ending inventory balance be?

a. $3,450

b. $3,225

c. $3,975

d. $3,300

Answer 1

The total ending inventory balance for Nelson Corporation, applying the lower-of-cost-or-market rule, would be $3,225. The lower-of-cost-or-market (LCM) rule is used to determine the value of inventory when the market value of a product drops below its cost.

Step-by-step explanation:

The lower-of-cost-or-market (LCM) rule is used to determine the value of inventory when the market value of a product drops below its cost. To calculate the ending inventory balance using the LCM rule, you compare the cost per unit with the market value per unit for each inventory item and use the lower value. In this case, for inventory item X, the market value per unit is $3.50, which is lower than the cost per unit of $4.00.

For inventory item Y, the market value per unit is $1.50, which is lower than the cost per unit of $2.00. For inventory item Z, the market value per unit is $4.00, which is higher than the cost per unit of $3.00. Therefore, the total ending inventory balance for Nelson Corporation would be calculated as follows:

150 units of X * $3.50 = $525

300 units of Y * $1.50 = $450

750 units of Z * $3.00 = $2,250

The total ending inventory balance would be $525 + $450 + $2,250 = $3,225.