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Merrimack Tractors and Mowers, Inc: Lifo or Fifo?

Essay by   •  June 20, 2019  •  Case Study  •  319 Words (2 Pages)  •  1,944 Views

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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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