Camping Gear, Inc. had 600 units of inventory on hand at the end of the year. These were recorded at a cost of $17 each using the last-in, first-out (LIFO) method. The current replacement cost is $15 per unit. The selling price charged by Camping Gear, Inc. for each finished product is $23. As a result of recording the adjusting entry as per the lower-of-cost-or-market rule, the gross profit will ________.

Question

Quizplus · Accepted Answer

According to the lower-of-cost-or-market rule, inventory should be reported at either its historical cost or its replacement cost, whichever is lower. In this case, the replacement cost ($15) is lower than the historical cost ($17), so the inventory should be written down to $15 per unit. This would result in a decrease in gross profit of $2 per unit ($23 selling price - $15 new cost), or a total decrease of $1,200 (600 units x $2 per unit). Therefore, the correct answer is option D, decrease by $1,200.