Lexington Company sells product 1976NLC for $20 per unit. The cost of one unit of 1976NLC is $18, and the replacement cost is $17. The estimated cost to dispose of a unit is $4, and the normal profit is 40% of selling price. At what amount per unit should product 1976NLC be reported, applying lower-of-cost-or-market

The answer is $16

Explanation:

Solution

Given that:

Now

Market = Present replacement cost

The Upper Limit of Market = Net Realizable value = Estimated Selling Price - Cost of Completion and Disposal

The Net Realizable Value = $20 - $4 = $16

Thus

The Upper Limit of Market = Net Realizable value = $16

Market = Present replacement cost = $17

So,

Lower Limit of Market = Net realizable value - normal profit margin

Lower Limit of Market = 16 (40% of 20)

= 16-8

=8

Thus

If the Present replacement cost is greater or higher than the selling, then the selling amount is the market amount

Therefore, the product should be reported at $16