Merrimack Tractors and Mowers, Inc: Lifo or Fifo ?

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Merrimack Tractors and Mowers, Inc.: LIFO or FIFO?
1.- Study the financial information for reel mower units that James Colburn prepared for Rick Martino. (Assume that the 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, and assuming 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. SalesQuarterUnits '000sUnit $ $ '000s

110 2,000 20,000
210 2,000 20,000
310 2,000 20,000
410 2,000 20,000
80,000

LIFOBeginning Inventory+ Purchases - Ending Inventory= Cost of Goods Sold (CGS) 2008Units '000s Price $ '000sUnits '000s Price $ '000sUnits '000s Price $ '000sUnits '000s Price $ '000s Q115 900 13,500 10 1,400 14,000 15 900 13,500 10 1,400 14,000 Q215 900 13,500 10 1,500 15,000 15 900 13,500 10 1,500 15,000 Q315 900 13,500 10 1,600 16,000 15 900 13,500 10 1,600 16,000 Q415 900 13,500 10 1,700 17,000 15 900 13,500 10 1,700 17,000 Year15 900 13,500 40 1,550 62,000 15 900 13,500 40 1,550 62,000

Proforma Income Statement, Year End 2008
LIFO20072008
$ '000s$ '000s
Sales 67,000 80,000
CGS 46,000 62,000
Gross Margin 21,000 18,000
Gross Margin %31%23%
Selling and Admin Exp. 10,000 10,000 Income before taxes 11,000 8,000 Income Tax (35%) 3,850 2,800
Net Income 7,150 5,200
Net Income %11%7%

2. How would this change if the unit sales pattern was 10,000; 5,000; 20,000; 5,000 units in the four quartes? Why? SalesQuarterUnits '000sUnit $ $ '000s
110 2,000 20,000
25 2,000 10,000
320 2,000 40,000
45 2,000 10,000
80,000

LIFOBeginning Inventory+ Purchases - Ending Inventory= Cost of Goods Sold (CGS) 2008Units '000s Price $ '000sUnits '000s Price $ '000sUnits '000s Price $ '000sUnits '000s Price $ '000s Q115 900 13,500 10 1,400 14,000 15 900 13,500 10 1,400 14,000 Q215 900 13,500 10 1,500 15,000 2015 900 13,500 5 1,500 7,500 - 5 1,500 7,500 Q32015 900 13,500 10 1,600 16,000 10 900 9,000 205 900 4,500 5 1,500 7,500 5 1,500 7,500 - 10 1,600 16,000 Q410 900 9,000 10 1,700 17,000 1510 900 9,000 5 1,700 8,500 5 1,700 8,500

Year15 900 13,500 40 1,550 62,000 15 1,167 17,500 40 1,450 58,000

Proforma Income Statement, Year End 2008
LIFO200720082008
$ '000s$ '000s$ '000s
Sales 67,000 80,000 80,000
CGS 46,000 62,000 58,000
Gross Margin 21,000 18,000 22,000 Gross Margin %31%23%28%
Selling and Admin...
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