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Under the last-in first-out (LIFO) inventory valuation method, a price index for inventory must be established for tax purposes. The quantity weights are based on year-ending inventory levels. Use the beginning-of-the-year price per unit as the base-period price and develop a weighted aggregate index for the total inventory value at the end of the year. What type of weighted aggregate price index must be developed for the LIFO inventory valuation?

 EndingUnitPrice ($)ProductInventoryBeginningEndingA500.15.19B501.601.80C1004.504.20D4012.0013.20\begin{matrix} \text{ } & \text{Ending} & \text{Unit} & \text{Price (\$)}\\ \hline \text{Product} & \text{Inventory} & \text{Beginning} & \text{Ending}\\ \hline \text{A} & \text{500} & \text{.15} & \text{.19}\\ \text{B} & \text{50} & \text{1.60} & \text{1.80}\\ \text{C} & \text{100} & \text{4.50} & \text{4.20}\\ \text{D} & \text{40} & \text{12.00} & \text{13.20}\\ \end{matrix}

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Paasche index\color{#4257b2}{\text{Paasche index}} must be developed for the LIFO inventory valuation. The weighted aggregate index in period tt is calculated by the following formula:

It=PitQitPi0Qit(100)\boxed{\color{#4257b2}{I_t=\dfrac{\sum{P_{it}Q_{it}}}{\sum{P_{i0}Q_{it}}}(100)}}

Therefore,

It=PitQitPi0Qit(100)=0.19(500)+1.80(50)+4.20(100)+13.20(40)0.15(500)+1.60(50)+4.50(100)+12.00(40)(100)104\begin{align*} I_t &=\dfrac{\sum{P_{it}Q_{it}}}{\sum{P_{i0}Q_{it}}}(100)\\ &=\dfrac{0.19(500)+1.80(50)+4.20(100)+13.20(40)}{0.15(500)+1.60(50)+4.50(100)+12.00(40)}(100)\\ &\approx\boxed{104} \end{align*}

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