Question

Oporto Corp. produces and sells forklift trucks. Model 17A (the “Protex”) has a list price of $140,000. The production cost for the 20 finished Protex units in inventory at the end of 20X4 was $120,000 per unit. Due to recent improvements in manufacturing flow, the cost of new production is expected to be $108,000 in the next year.

The list price for the Protex will be reduced by $10,000 at the beginning of 20X5. The price reduction will reflect the reduced manufacturing cost and undercut the prices of generally comparable competing models made by other manufacturers. The Protex model often is sold below the list price; the actual discount varies by customer but is usually 10% less than list price for the regular industrial clients that comprise 40% of HMC’s sales. Individual nonrepeat buyers receive smaller discounts, averaging about 3%. HMC’s sales agents receive a 6% commission on the actual sales price. The buyer bears the cost of shipping.

 

Required:

1. What value should be used for the lower of cost or NRV test? What amount of writedown is required?

2. Assume that early in 20X5 the company sells five Protex units for $126,000 each. How much gross profit will be recorded, assuming that the company uses FIFO?

Answer 1

Requirement 1

 

Average discount X 40% of sales at 10% discount; 60% of sales at 3% discount =

       (0.40 × 0.10) + (0.60 × 0.03) = 0.04 + 0.018 = 5.8% average discount

 

NRV = [($140,000 – $10,000) × (1.0 ­– 0.058) discount] × (1 – .06) commission

        = $130,000 × 0.942 × 94%

        = $122,460 × 94%

        = $115,112

 

Writedown = ($120,000 – $115,112) × 20 = $4,888 × 20 = $97,760

 

Requirement 2

 

Revenue = $126,000 × 94% × 5 = $592,200

 

Cost of goods sold = $115,112 × 5 = $575,560

 

Gross profit = $16,640

Requirement 1:

Writedown = ($120,000 – $115,112) × 20 = $4,888 × 20 = $97,760

 

Requirement 2  

Gross profit = $16,640