Effect of LOCOM rule on income Refer to P9.6. As a result of European Commission health warnings, demand for large beer tankards falls sharply. Svejk estimates their net realisable value (that is, sale price, net of selling costs) is 5/unit in December x6.

Required

(a) What is the effect of the above events on Svejk’s x6 gross profit if the company values inventory

(i) at FIFO cost; (ii) at the lower of FIFO cost or market?

(b) Svejk sells the remaining tankards in x7 for 6/unit. It makes no further purchases in x7. What is the gross profit it reports on this product line in x7 under (i) FIFO cost; (ii) LOCOM? Looking at Svejk’s x6 and x7 results under the two valuation assumptions, what conclusions can we draw about the impact of the LOCOM rule on company accounts?

AppenedixLO1