Marrimark case(FIFO_LIFO) - Coursework Example

The ever strengthening value of the Chinese currency which is denominated in Yuan or Renminbi against the US Dollar became another adverse factor for the company as this compounded and further elevated the increase in costs incurred by Merrimack. The flexibility in the exchange rate by Chinese authorities against US Dollar decreased from a CNY: USD ratio of 8.3:1 until mid-2005 to below 7.0:1 by early 2008. Oil prices increase further deteriorated the situation for Merrimack as this elevated shipping costs of transporting finished mowers to the United States by almost 200% with the cost of shipping a 40-foot container from Shanghai to US rising from $3,000 in 2000 to almost $9,000 by 2008.

The above critical factors changed the advantage of outsourcing for Merrimack into a soul disadvantage as these cost increments did not affect Merrimack’s competitors such as The Toro Company who has its material manufacturing setup in the United States. This rival was comparatively less affected by the increase in manufacturing costs in Asia and indeed benefitted from the weakening dollar in export markets in which it played and competed. All these aspects shrank Merrimack’s sales margins for tractors and mowers and the projected bottom-line or net income of 2008 was lower than that of yielded in 2007 and earlier years.

This was not acceptable to the stakeholders of the company and the outside directors pressurized the company’s CEO to keep growing earnings and profits otherwise which will lead to a professional manager to replace him who was not a family member of the Martinos. All these factors were taken into account but the idea of re-development and re-establishing of manufacturing operations in Nashua were dismissed by the company. Searching for another off-shore supplier was a possibility to carry out but that too not before 2009 to sustain the current trends of net income and growth of the company.

These plans were not ought to be good and executable plans until the company controller or the CFO, James Colburn, thought of varying the inventory valuation methods for tractors, mowers and parts, to boost up Merrimack’s bottom-line and satisfy its stakeholders. The CFO had an idea to change the company’s current inventory valuation method (LIFO) into FIFO which will ultimately elevate earnings but will come together with an increase in the tax payables. This was a plan which the CEO had to clearly conceive in order for it to be executed or rejected.

The CEO’s concern is to enhance the earnings position of the company and satisfy its stakeholders. After hearing the CFO’s idea about changing inventory valuation method, the CEO ordered the CFO to prepare a memo and a pro-forma income statement for the year 2008 to depict the changes in the bottom-line. The CEO is studying on the drastic impact which a simple change in accounting methods can bring for a company. Effect of CFO’s suggestion on Merrimack’s financial statements The change of the inventory valuation method from LIFO to FIFO which the CFO is suggesting would have a number of effects on the company’