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 …show more content…
below analyses the need for a change in accounting procedure for inventory and its effect by shifting from LIFO to FIFO. We can conclude that a shift to FIFO may be beneficial in the short run even though taxable income increases since the procedure is in accordance with IFRS guidelines. This will in turn help the CEO to justify the performance of the company in an year of rising costs.
Identification Problem Identification –
• With the economic development, including activities like Beijing Olympics 2008, wages and labor cost in China has increased.
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
• • • •
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 …show more content…
earnings.
Possible solution Merrimack Tractors and Mowers Inc has been using the accounting method of LIFO for inventory valuation for a long time (since its setup in 1980).
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
statement.
Numerical Analysis According to Exhibit 2, Total inventory under the FIFO method = 19000
Using FIFO method for 2008,
Beginning inventory: 15000 units at 1266.67 =19000 Purchases, Quarter 1: 10000 units at 1400 =14000 Purchases, Quarter 2: 10000 units at 1500 =15000 Purchases, Quarter 3: 5000 units at 1600 =8000 Total Cost of Goods Sold =56000
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Purchases, Quarter 3: 5000 units at 1600 =8000 Purchases, Quarter 4: 10000 units at 1700 =17000 Total cost of Closing inventory: =25000
Using LIFO method for 2008,
Purchases, Quarter 4: 10000 units at 1700 = 17000 Purchases, Quarter 3: 10000 units at 1600 = 16000 Purchases, Quarter 2: 10000 units at 1500 =15000 Purchases, Quarter 1: 10000 units at 1400 =14000 Total Cost of goods sold =62000
Beginning inventory, 15000 units at 900 = 13500
Thus, Change in profit by using FIFO method = 25000-13500-5500=6000k Here 5500k is the last year’s LIFO adjustment
Increase in profit due to change in accounting method from LIFO to FIFO = $6,000,000
However, the sudden change in profit may create an element of doubt in the investor and he may realize the reason for the sudden change in profit shown. Hence, an appropriate explanation needs to be given to the investors in the notes of the Financial Statement. The justification can be given stating that the change is in accordance with the IFRS guidelines and was long due. Thus, the change has been made in accordance with standard accounting profits as LIFO accounting system is prohibited under IFRS guidelines.
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Conclusion
As seen from the numerical analysis above, the company will be at a better position as the profits declared will show an increase in net profits. The advantage of this is much higher than the disadvantage if paying additional tax on the profits earned. Thus, the company should go for the FIFO method of inventory accounting.
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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 …show more content…
below analyses the need for a change in accounting procedure for inventory and its effect by shifting from LIFO to FIFO. We can conclude that a shift to FIFO may be beneficial in the short run even though taxable income increases since the procedure is in accordance with IFRS guidelines. This will in turn help the CEO to justify the performance of the company in an year of rising costs.
Identification Problem Identification –
• With the economic development, including activities like Beijing Olympics 2008, wages and labor cost in China has increased.
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
• • • •
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
1|Page
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 …show more content…
earnings.
Possible solution Merrimack Tractors and Mowers Inc has been using the accounting method of LIFO for inventory valuation for a long time (since its setup in 1980).
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
statement.
Numerical Analysis According to Exhibit 2, Total inventory under the FIFO method = 19000
Using FIFO method for 2008,
Beginning inventory: 15000 units at 1266.67 =19000 Purchases, Quarter 1: 10000 units at 1400 =14000 Purchases, Quarter 2: 10000 units at 1500 =15000 Purchases, Quarter 3: 5000 units at 1600 =8000 Total Cost of Goods Sold =56000
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Purchases, Quarter 3: 5000 units at 1600 =8000 Purchases, Quarter 4: 10000 units at 1700 =17000 Total cost of Closing inventory: =25000
Using LIFO method for 2008,
Purchases, Quarter 4: 10000 units at 1700 = 17000 Purchases, Quarter 3: 10000 units at 1600 = 16000 Purchases, Quarter 2: 10000 units at 1500 =15000 Purchases, Quarter 1: 10000 units at 1400 =14000 Total Cost of goods sold =62000
Beginning inventory, 15000 units at 900 = 13500
Thus, Change in profit by using FIFO method = 25000-13500-5500=6000k Here 5500k is the last year’s LIFO adjustment
Increase in profit due to change in accounting method from LIFO to FIFO = $6,000,000
However, the sudden change in profit may create an element of doubt in the investor and he may realize the reason for the sudden change in profit shown. Hence, an appropriate explanation needs to be given to the investors in the notes of the Financial Statement. The justification can be given stating that the change is in accordance with the IFRS guidelines and was long due. Thus, the change has been made in accordance with standard accounting profits as LIFO accounting system is prohibited under IFRS guidelines.
3|Page
Conclusion
As seen from the numerical analysis above, the company will be at a better position as the profits declared will show an increase in net profits. The advantage of this is much higher than the disadvantage if paying additional tax on the profits earned. Thus, the company should go for the FIFO method of inventory accounting.
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