Merrimack Tractors and Mowers Inc
Essay by shalabhg86 • October 16, 2011 • Essay • 376 Words (2 Pages) • 1,602 Views
Merrimack Tractors and Mowers Inc. was a major regional manufacturer and seller of large commercial grass mowers. Rick Martino headed the company after his father's death, starting from 1995. The mowers were originally manufactured and assembled in a workshop and factory in Nashua. But to reduce the costs, by 2008, the company started buying all of its tractors and machines from a contract manufacturer in China. So, it started operating as a designer and distributor only. This was done to take benefits from low labour costs in China, and the low shipping costs.
In 2008, due to many factors like economic development, Beijing Olympic Games, rising oil prices etc. led to increased wages and labour costs in China along with high material and energy costs. Also, the cost of shipping from China had increased from $3000 to $9000. Merrimack's competitors had their manufacturing presence in US also and so they were not affected as badly as Merrimack company due to increased costs in China.
As a result of the above factors, the sales margins on tractors and mowers of Merrimack company started declining and the company's president came under immense pressure. The net income for the year 2008 was below that of 2007 and earlier years.
Due to increased inventory and manufacturing costs, the profit of the company was going down. The company controller, James Colburn, suggested an idea of changing the inventory accounting method to increase the profits. The problem is to analyze the current and suggested inventory accounting method and suggest the president of the company, Rick Martino, that which accounting method should he use to handle this situation better.
Current Method: LIFO:
In the current system of inventory accounting, the company is following LIFO method. The LIFO method assumes that the most recent purchase costs are related to current avenues. So, the ending inventory reflects the oldest costs. If a company uses this method, it is able to show less income on its books as the margins are lower if the prices are increasing. So a company is able to save tax by using this method.
Eg. If there are three purchases done in the following order: 10, 15, 20 and one of the item is sold, then the cost of goods sold will be 20.
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