A company normally sells its product for $20 per unit. However, the selling price has fallen to $15 per unit. This company's current inventory consists of 200 units purchased at $16 per unit. Replacement cost has now fallen to $13 per unit. What is the amount of the lower cost of market adjustment the company must make as a result of this decline in value?
A) $400.
B) $600.
C) $800.
D) $1,400.
E) $1,000.

Question

Quizplus · Accepted Answer

The lower of cost or market rule requires inventory to be reported at the lower of its historical cost or market value. The market value is the replacement cost, which is $13 per unit. The historical cost is $16 per unit. The adjustment is the difference between the historical cost and the market value, multiplied by the number of units: (16 - 13) * 200 = $600.

A Company Normally Sells Its Product for $20 Per Unit