Merrimack Tractors and Mowers, Inc: Lifo or Fifo?
Essay by Abhijeet Singh • June 20, 2019 • Case Study • 319 Words (2 Pages) • 1,802 Views
Case 1: Merrimack Tractors and Mowers, Inc: LIFO or FIFO?
Study the financial information for reel mower units that James Colburn prepared for Rick Martino. (Assume that reel mower units are typical of all classes of inventory at Merrimack.) Prepare a pro-forma income statement assuming no changes in accounting policy for 2008 assuming that the company sells 10,000 units each quarter at a price of $2,000 per unit with Sales General and Administration costs the same as for 2007.
| 2007 (LIFO) | 2008 (LIFO) | ||||
Units | Per Unit | Cost ($'000) | Units | Per Unit | Cost ($'000) | |
Beginning Inventory | 15000 | 900 | 13500 | 15000 | 900 | 13500 |
Purhases, Q1 | 10000 | 1000 | 10000 | 10000 | 1400 | 14000 |
Purhases, Q2 | 10000 | 1100 | 11000 | 10000 | 1500 | 15000 |
Purhases, Q3 | 10000 | 1200 | 12000 | 10000 | 1600 | 16000 |
Purhases, Q4 | 10000 | 1300 | 13000 | 10000 | 1700 | 17000 |
Available for Sale | 55000 | 59500 | 55000 | 75500 | ||
Less Sales | 40000 | 46000 | 40000 | 62000 | ||
Ending Inventory | 15000 | 13500 | 15000 | 13500 |
Income Statement | ||
2007 (LIFO) ($'000) | 2008 (LIFO) ($'000) | |
Sales | 67,000 | 80,000 |
Cost of goods sold | 46,000 | 62,000 |
Gross margin | 21,000 | 18,000 |
Selling and admin exp | 10,000 | 10,000 |
Income before taxes | 11,000 | 8,000 |
Income taxes (35%) | 3,850 | 2,800 |
Net Income | 7,150 | 5,200 |
How would this change if the unit sales pattern was 10,000, 5,000, 20,000, 5,000 units in the four quarters? Why? (assume inventory count is done every quarter)
Cost of Good Sold
= $(10000 x 1400) + (5000 x 1500) + [(10000 x 1600)
+ (5000 x 1500) + (5000 x 900)] + (5000 x 1700)
= $58,000,000
Income Statement | |
2008 (LIFO) ($'000) | |
Sales | 80,000 |
Cost of goods sold | 58,000 |
Gross margin | 22,000 |
Selling and admin exp | 10,000 |
Income before taxes | 12,000 |
Income taxes (35%) | 4,200 |
Net Income | 7,800 |
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