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