Case 1: Merrimack Tractors and Mowers, Inc: LIFO or FIFO?

1. 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.) 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.

The cost of goods sold (COGS) is depends on the beginning inventory, purchases in the quarter and the ending inventory.
Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory
In this case, assuming Merrimack Tractors has generated a total revenue of $80 million by selling 40,000 units at $2,000 each. By employing the LIFO method to calculate their inventory, the most recent costs are matched with the revenue first. The table below illustrates the total cost of purchase at each quarter. The total cost of goods sold ($62 million) was derived from recording the most recent cost of purchases by adding $14 million, $15 million, $16 million and $17 million.
Table 1a: Inventory record for year 2007 and 2008 with even sales pattern in LIFO
| |2007 (LIFO) |2008 (LIFO) |
| |(with even sales pattern) |(with even sales pattern) |
| |Units |Per Unit ($) |
|Sales | 67,000 | 80,000 |
|Cost of goods sold | 46,000 | 62,000