The following data apply to a unit of inventory:
Selling price ...................$22
Selling cost...................... 2
Normal profit margin ...... Accounting MCQs | Accounting MCQs

The following data apply to a unit of inventory:
Selling price ...................$22
Selling cost...................... 2
Normal profit margin .........5
Replacement cost .............10
Using the lower of cost or market (LCM) method of measuring inventory, what is the market amount for this unit of inventory?

$10.00$15.00$17.50$20.00Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (B) is correct. Under the LCM method, market is current replacement cost subject to a maximum (ceiling) equal to net realizable value and a minimum (floor) equal to net realizable value minus a normal profit margin. NRV equals selling price minus costs of completion and disposal. Thus, the maximum market amount is the $20 NRV ($22 selling price – $2 selling cost), and the minimum is $15 ($20 NRV – $5 normal profit margin). Because the minimum exceeds the $10 replacement cost, it is the market amount.