Question

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

Product #1 Product #2
Historical cost $8 $19
Replacement cost 12 12
Estimated cost to dispose 2 5
Estimated selling price 21 33
In pricing its ending inventory using the lower-of-cost-or-market, what unit values should Blossom use for products #1 and #2, respectively?

Answer 1

Answer and Explanation:

The computation of the unit values that used for the products 1 and 2 is shown below

But before that the following formulas are there

Ceiling

= Net realizable value = Selling price - predicted dispose cost

Floor = Net realizable value - Normal profit Margin

Market value = Middle of Ceiling, Floor, Replacement cost

Now

Particulars Product#1 Product#2

Historical cost $8 $19

Ceiling $19 ($21 -$2) $28 ($33- $5)

Floor $12.7 $18.1

[$19 - ($21 × 30%)] [$28 - ($33 × 30%)]

Replacement cost $12 $12

Market $12.7 $18.1

Lower of cost or market $8 $18.1