During year 1 the ABC Company purchases one item of inventory for $70. The normal selling price is $110, which represents a gross margin percentage of 30%.

 The item is held during the entire year. However, during the current year its replacement cost falls 10%. (from $70 to $60 means 70-60 =10) . No other transaction takes place during the year.

 During year 2 the item is sold for $100.

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