Merrimack Tractors And Mowers Case Summary

Merrimack Tractors & mowers, Inc.

Course: Managerial Accounting & Control -1 Batch: PGP (2011 – 2013)

Submitted on:

5th September, 2011

Executive Summary
Merrimack Tractors and Mowers, Inc was a major regional manufacturer and seller of large commercial grass mowers based on a design developed by the grandfather of Ricardo Martino. The company’s major competitors were John Deere, The Toro Company, Simplicity, and Husqvarna which were much older with extensive lines of lawn care and maintenance equipment. About 25% of the outstanding stock of the company was held by the members of the Martino family and shares were traded on NASDAQ. By 2008, the company was buying all of its tractors and machines manufactured in China. The report
Moreover, material and energy costs were also rising Strengthening Chinese currency (Yuan or Renminbi) compared to US dollar Loyal suppliers increased prices Rising oil prices increased cost of shipping Competitors like Toro Company were less affected

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Thus, sales margins on tractors and mowers were under pressure. Seeking another off-shore supplier was not possible in the restricted timeline. Same was the case for re-establishing manufacturing operations in Nashua. Thus, the company controller suggested a change in the accounting process from LIFO to FIFO system for inventory accounting. A change such as this would require additional disclosures in the notes of the financial statement.

Need for Change The company has decided to change its inventory accounting method from LIFO to FIFO as this will increase the profit by reducing the Cost of Goods sold. As the inventory gets consumed, the
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valuation will be for current market price. However, for the time being, the profit shown by the company in the financial statement will be considerably higher. This will lead an increased projection of profit of $ 5.5 million. The extra tax of $ 2 million will be created due to increase in the
Since the profits shown in this method are lower, the net profit figure over a period of 28 years will be a conservative and low figure. If the FIFO method of inventory valuation is adopted, the cost of goods sold will be matched against costs at a lower level and thus the profit shown will increase drastically at the current rate. Since the company does not have an alternative to address the pressure from the directors and to maintain its earnings at a time of rising costs, the FIFO method of inventory valuation will help increase the net profit shown in the financial