Question

Oslo Corporation has two products in its ending inventory, each accounted for at the lower of cost or market. Aprofit margin of 30% on selling price is considred normal for each product. Specific data with respect to each product follows:


Product 1 Product 2


Historical cost 20.00 35.00


Replacement cost 22.50 27.00


Estimated cost to dispose 5.00 13.00


Estimated selling price 40.00 65.00

In pricing its ending inventory using the lower of cost or market, waht units values should Oslo use for products #1 and # respectively?

Answer 1

Answer:

$20.00 and $32.50

Explanation:

The computation of the ending inventory using the lower of cost or market value which is shown below

For Product 1

Given that

Replacement Cost = $22.50

Net Realizable Value is

= Estimated selling price - Estimated cost to dispose

= $40 - $5

= $35

So, the market value is

= Net Realizable Value - Profit Margin

= $35 - (0.30 × $40)

= $23

As we can see that the cost is $20 and the market value is $23 so the lower value is $20 and the same should be selected

For Product 2

Given that

Replacement Cost = $27

Net Realizable Value is

= Estimated selling price - Estimated cost to dispose

= $65 - $13

= $52

So, the market value is

= Net Realizable Value - Profit Margin

= $52 - (0.30 × $65)

= $32.50

As we can see that the cost is $35 and the market value is $32.5 so the lower value is $32.5 and the same should be selected