Crane Sales Company uses the retail inventory method to value its merchandise inventory. The following information is available for the current year: If the ending inventory is to be valued at the lower-of-cost-or-market, what is the cost-to-retail ratio?
A) $207,500 ÷ $285,000
B) $207,500 ÷ $293,500
C) $205,000 ÷ $295,000
D) $207,500 ÷ $283,500

Question

Crane Sales Company uses the retail inventory method to value its merchandise inventory. The following information is available for the current year:  If the ending inventory is to be valued at the lower-of-cost-or-market, what is the cost-to-retail ratio?
A) $207,500 ÷ $285,000 
B) $207,500 ÷ $293,500 
C) $205,000 ÷ $295,000 
D) $207,500 ÷ $283,500

Quizplus · Accepted Answer

To find the cost-to-retail ratio, we need to divide the cost of goods available for sale ($293,500) by the retail value of goods available for sale ($402,000).

Cost-to-retail ratio = Cost of goods available for sale ÷ Retail value of goods available for sale
Cost-to-retail ratio = $293,500 ÷ $402,000
Cost-to-retail ratio = 0.7296

Since we need the ending inventory to be valued at the lower-of-cost-or-market, we need to look at the cost and market values for each item and choose the lower value. We can then calculate the ending inventory at cost by multiplying the cost-to-retail ratio by the retail value of the ending inventory.

Retail value of ending inventory = $117,500
Cost-to-retail ratio = 0.7296
Cost of ending inventory = $117,500 × 0.7296
Cost of ending inventory = $85,717

Therefore, the cost-to-retail ratio is $207,500 ÷ $293,500, or 0.706 and the best choice is B.

Crane Sales Company Uses the Retail Inventory Method to Value