DVDs usually sell for $14 per unit, and have a profit margin of 25%. However, theexpected 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.

Question

Quizplus · Accepted Answer

The lower of cost and net realizable value is the method for valuing inventory where the inventory is valued at the lower of its cost or its net realizable value.

The cost of the inventory is the original price paid for each unit, which is $10.

The net realizable value is the expected selling price minus any additional costs to sell, such as shipping or handling. Since the expected selling price is $7 per unit and the profit margin is 25%, the additional costs to sell would be $7 - ($7 * 0.25) = $5.25 per unit.

Since the net realizable value is lower than the cost, the inventory should be valued at the net realizable value.

The value of the inventory is calculated as follows:

- 200 units purchased at $10 per unit = $2,000 (cost)
- Expected selling price = $7 per unit
- Additional costs to sell = $5.25 per unit
- Net realizable value = $7 - $5.25 = $1.75 per unit
- Value of the inventory at net realizable value = 200 units x $1.75 per unit = $350
- Therefore, the value of the inventory at the lower of cost and net realizable value is $350 or Choice Letter D.

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