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Q. 3.1

At the end of its financial year, a lady’s fashion business has 500 green handbags
which cost the company £10 each. The normal selling price of a handbag is £25,
but due to fashion changes, no one wants to buy green handbags. The company is
now only able to sell yellow handbags. The only chance of selling green handbags
is to add a yellow strap at a cost of £2 per handbag and to reduce the selling price to
£8 each. What is the closing value of inventory?

Verified Solution

The closing inventory of green handbags would be valued at:

$(500 \times £8 ) – (500 \times £2 )= £3,000.$

Note that neither the original cost price nor the ‘normal’ selling price are relevant to
the calculation in this example.