Riaz Khan, Sec B, NAC Assignment

MLkkIMACk 1kAC1CkS AND MCWLkS INC LIIC Ck IIIC?

Merrlmack 1racLors and Movers ls a uS based company Larller lL used Lo assemble mowers
ln nashua buL afLer 1980 lL sLopped manufacLurlng and assembllng operaLlons and sLarLed buylng lLs
LracLors and machlnes from Chlna 8y 2008 |mports cost from Ch|na was r|s|ng because of followlng
reasons
O ncreased wages and labour cosLs
O SLrengLhenlng of Chlnese currency
Consequences
O 9ro[ecLed neL lncome of year 2008 was below LhaL of 2007 and earller years
O LxLernal ulrecLors were forclng CCC 8lck MarLlno Lo keep lncomes growlng else qulL

So|ut|on
!ames Colburn company conLroller suggesLed LhaL Lhey have been followlng LasLln flrsLouL (LC)
meLhod of lnvenLory valuaLlon and have been able Lo save on Laxes because of lL buL lf Lhey changed
Lhelr meLhod from LC Lo C (lrsLln lrsLouL) Lhen Lhey can lncrease lncome flgures aL Lhe cosL
of lncrease ln Lhe Laxes payable 1o conslder Colburn's ldea 8lck needed deLalled flnanclal analysls
whlch ls as follows

valuaLlon of Lhe nvenLorles for Lhe years 2007 and 2008 on LIIC bas|s

2007 2008
Units Cost Per Unit Cost Units Cost Per Unit Cost
Beginning Inventory 15000 900 13500000 15000 900 13500000
Purchases, Quarter 1 10000 1000 10000000 10000 1400 14000000
Purchases, Quarter 2 10000 1100 11000000 10000 1500 15000000
Purchases, Quarter 3 10000 1200 12000000 10000 1600 16000000
Purchases, Quarter 4 10000 1300 13000000 10000 1700 17000000
Available Ior Sale 55000 59500000 55000 75500000
Less: Sales 40000 46000000 40000 62000000
Ending Inventory 15000 13500000 15000 13500000


9ro[ecLed ncome SLaLemenLs for Lhe years 2007 and 2008 based on LIIC method

ncome Statement - 2007 ncome Statement - 2008
Sales 67000000 70350000
Less: Cost oI Goods
Sold 46000000 62000000
Gross Margin 21000000 8350000
Selling and Admin Exp. 10000000 10000000
Income beIore Taxes 11000000 -1650000
Income Taxes (35) 3850000 0
Net Income 7150000 -1650000




Riaz Khan, Sec B, NAC Assignment

LvaluaLlon of lnvenLorles on IIIC bas|s (As suggesLed by Colburn)

2008
Units Cost Per Unit Cost
Beginning Inventory 15000 900 13500000
Purchases, Quarter 1 10000 1400 14000000
Purchases, Quarter 2 10000 1500 15000000
Purchases, Quarter 3 10000 1600 16000000
Purchases, Quarter 4 10000 1700 17000000
Available Ior Sale 55000 75500000
Less: Sales 40000 50500000
Ending Inventory 15000 25000000

or preparlng ncome sLaLemenL of year 2008 we need Lo Lake followlng assumpLlons as case do noL
provlde daLa regardlng Lhem
O An lncrease of 3 ln sales revenue ls assumed for Lhe year 2008 because Lhe cosLs are
rlslng and company mlghL have lncreased lLs sales prlce Lo compensaLe loss ln proflLs
O Selllng and AdmlnlsLraLlon expenses are sLlll same as LhaL of year 2007
O ncome Lax percenLage ls also same as LhaL of year 2007

ncome SLaLemenL on IIIC bas|s for year 2008

ncome Statement
Sales 70350000
Less: Cost oI Goods Sold 50500000
Gross Margin 19850000
Selling and Admin Exp. 10000000
Income beIore Taxes 9850000
Income Taxes (35) 3447500
Net Income 6402500

Inference

O AfLer comparlng lncome sLaLemenLs of year 2008 based on LC and C meLhods we can
observe a drasLlc lmpacL lL had on nL1 nCCML nL1 nCCML ls poslLlve when C meLhod
ls used and negaLlve when LC ls used
O As per Colburn's reporL real cosL of swlLchlng over Lo C ls $ 33 mllllon and wlll lead Lo
lmmedlaLe Lax llablllLy of $ 2 mllllon buL sLlll we wlll be lefL wlLh $ 33 mllllon whlch wlll
lncrease Lhe lncome
O ncreaslng Lax burden ls a concern buL aL leasL lL wlll glve 8lck some Llme Lo see how real
problem of rlslng cosLs can be solved
O urLher afLer Clymplcs ln Chlna are over Lhere ls a posslblllLy LhaL wages and labour cosLs
can come down and dollar may regaln sLrengLh