A firm is writing its inventory down to the lower of cost or market. It has determined the following per unit costs and market prices for its product: $\begin{array}{ll}
\text { Original cost } & \$ 104 \
\text { Sales price } & 120 \
\text { Selling cost } & 20 \
\text { Normal profit } & 18 \
\text { Replacement cost } & 78
\end{array}$ Given these data, the firm should value its inventory at a per unit cost of

Question

Quizplus · Accepted Answer

The lower of cost or market rule requires inventory to be valued at the lower of its original cost or market value. Market value is defined as the replacement cost, but it must not exceed the net realizable value (sales price minus selling cost) and must not be less than the net realizable value minus normal profit. Here, the net realizable value is $100 ($120 - $20), and the net realizable value minus normal profit is $82 ($100 - $18). The replacement cost is $78, which is below $82, so the inventory should be valued at $82.

A Firm Is Writing Its Inventory Down to the Lower