Read the case study, Merrimack Tractors and Mowers, Inc.: LIFO or FIFO? In 2008, Merrimack Tractors and Mowers found itself in a situation where product manufacturing costs were increasing faster than competitors’ costs and, as a result, earnings were likely to fall below those reported in 2007. The company president and the company controller discussed this problem, and the controller mentioned the idea that if the company changed from LIFO to FIFO it might be possible to maintain earnings growth in 2008. He prepared a memo to the president explaining how inventory flow assumptions work and provided pro-forma income statements showing that, for one product (reel mower units), adopting FIFO would allow Merrimack to report higher income in 2008 than it did in 2007, but higher income taxes would have to be paid. Review the attached spreadsheet. The spreadsheet lays out the computations for 2007 for all three inventory methods. You can compare the computations with Exhibit 2 in the case study. Study the financial information for reel mower units that James Colburn prepared for Rick Martino. (Assume that reel mower units are typical of all classes of inventory at Merrimack.) In a word doc format answer the following: 1. Prepare a pro-forma income statement assuming no changes in accounting policy for 2008 assuming that 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. 2. Do you think that Martino will keep his job if he reports this result?
