DVDs usually sell for $14 per unit, and have a profit margin of 25%. However, the expected selling price has fallen to $7 per unit. The Movie Company's current inventory includes 200 units purchased at $10 per unit. Calculate the value of the inventory at the lower of cost and net realizable value.
A) $1,350
B) $1,400
C) $1,500
D) $1,800
E) $2,000

Question

Quizplus · Accepted Answer

Since the net realizable value is lower than the original cost, we need to use the lower of cost and net realizable value method.

The net realizable value can be calculated by taking the expected selling price ($7) and subtracting the expected costs to sell (25% of $7, which is $1.75).

Net Realizable Value = $7 - $1.75 = $5.25

Therefore, the value of the inventory at the lower of cost and net realizable value is:

Value of Inventory = 200 units x $5.25 = $1,050

Since the cost of the inventory is higher than the calculated net realizable value, we use the net realizable value as the value of the inventory.

However, since the inventory was purchased at $10 per unit, we need to adjust for the difference in cost and net realizable value. The adjustment is calculated as:

Adjustment = 200 units x ($10 - $5.25) = $950

Therefore, the value of the inventory at the lower of cost and net realizable value is:

Value of Inventory = $1,050 + $950 = $2,000

The best choice is B as it reflects the correct value of the inventory at the lower of cost and net realizable value.

DVDs Usually Sell for $14 Per Unit, and Have a Profit