Merrimack Tractors and Mowers, Inc: Lifo or Fifo

Only available on StudyMode
  • Download(s) : 685
  • Published : August 25, 2010
Open Document
Text Preview
Assumptions: Following assumptions are made for projecting income in 2008: •No drop in sales for 2008.
Selling and administrative expenses remain constant.
Increase in sales price by 15% as inventory price increased by more than 30% on average. Considering the following assumptions we calculate the income with LIFO and FIFO method. Inventory:
Inventory
20072008
UnitsPer UnitCost in $’000UnitsPer UnitCost in $’000
Beginning Inventory15000900135001500090013500
Purchases, Q11000010001000010000140014000
Purchases, Q21000011001100010000150015000
Purchases, Q31000012001200010000160016000
Purchases, Q41000013001300010000170017000
Available for Sale55000 5950055000 75500
Less Sales40000 40000
Ending Inventory15000 15000

Cost Of Goods Sold(LIFO) 46000 62000
Cost Of Goods Sold(FIFO) 40500 50500

Comparison LIFO vs. FIFO:
Income Statement LIFO:
Income Statement in $'000
2007 (LIFO)2008(LIFO)
Sales67000Sales77050
Cost Of Goods Sold46000Cost Of Goods Sold62000
Gross Margin21000Gross Margin15050
Selling and Admin Exp10000Selling and Admin Exp10000
Income before Taxes11000Income before Taxes5050
Income Taxes (35%)3850Income Taxes (35%)1768
Net Income7150Net Income3282

Income Statement FIFO:
Income Statement in $'000
2007(FIFO)2008(FIFO)
Sales67000Sales77050
Cost Of Goods Sold40500Cost Of Goods Sold50500
Gross Margin26500Gross Margin26550
Selling and Admin Exp10000Selling and Admin Exp10000
Income before Taxes16500Income before Taxes16550
Income Taxes (35%)5775Income Taxes (35%)5793
Net Income10725Net Income10757

Result:
Change in income for 2007 due to migration from LIFO to FIFO for inventory calculations = + 3575000 $
Change in income for 2008 due to migration from LIFO to FIFO for inventory calculations = + 7475000 $
A 15% increase in sales price resulted into decrease in...
tracking img