Over sufficiently long time spans, income is cash-in less cash-out; cost basis for inventory. Duggan Company began business on January 1, Year 1. Information concerning merchandise inventories, purchases, and sales for the first three years of operations follows:

Year 1 Year 2 Year 3 Sales $200,000 Purchases 210,000 Inventories, December 31:

At cost 60,000 At market 50,000

a. Compute the gross margin on sales (sales minus cost of goods sold) for each year, using the lower-of-cost-or-market basis in valuing inventories.

b. Compute the gross margin on sales (sales minus cost of goods sold) for each year, using the acquisition cost basis in valuing inventories.

c. Indicate your conclusion about whether the lower-of-cost-or-market basis of valuing inventories is conservative.