Herman Company has three products in its ending inventory. Specific per unit data at the end of the year for each of the products are as follows: Product 1 Product 2 Product 3 Cost $ 26 $ 96 $ 56 Replacement cost 24 91 46 Selling price 46 126 63 Selling costs 8 31 14 Normal profit margin 11 36 18 Required: What unit values should Herman use for each of its products when applying the lower of cost or market (LCM) to ending inventory

Answer and Explanation:

The computation of the unit values for each of the product using the lower of cost or market (LCM) for ending inventory is shown below:

For Product 1

The Cost is $26

And, the market value = Selling price - selling cost - normal profit margin

= $46 - $8 - $11

= $27

So, the lower value would be $26

For Product 2

The Cost is $96

And, the market value = Selling price - selling cost

= $126 - $31

= $95

So, the lower value would be $95

For Product 3

The Cost is $56

And, the market value = Selling price - selling cost

= $63 - $14

= $49

So the lower value would be $49

As we can see that

In the product 2, the replacement cost is $91 and the market value without taking the normal profit margin is $36 that is lower than the replacement cost so we do not considered the normal profit margin in the computation part

This same method is applied for the product 3 as well