Given: J Y, president of E Co., recently read an article that claimed that at least 100 of the country’s largest 500 companies were either adopting or considering adoption of the last-in first-out (LIFO) method for valuing inventories. The article stated that the firms were switching to LIFO to: (1) Neutralize the effect of inflation in their financial statements, (2) Eliminate inventory profits, and (3) Reduce income taxes. Ms. Y wonders if the switch would benefit her company. The company has a high inventory turnover rate, and inventories represent a significant proportion of the assets. Ms. Y has been told that the LIFO system is more costly to operate and will provide little benefit to companies with high turnover. She intends to use the inventory method that is best for the company in the long run rather than selecting a method just because it is the current fad. (a) To explain: What “inventory profits” are and how the LIFO method of inventory valuation could reduce them to Ms. Y.

Question

Chalmers Corporation operates in multiple areas of the globe, and relatively large price changes are common. Presently, the company sells 110,200 units for $50 per unit. The variable production costs are $20, and fixed costs amount to $2,079,500. Production engineers have advised management that they expect unit labor costs to rise by 10 percent and unit materials costs to rise by 15 percent in the coming year. Of the $20 variable costs, 25 percent are from labor and 50 percent are from materials. Variable overhead costs are expected to increase by 20 percent. Sales prices cannot increase more than 12 percent. It is also expected that fixed costs will rise by 10 percent as a result of increased taxes and other miscellaneous fixed charges. The company wishes to maintain the same level of profit in real dollar terms. It is expected that to accomplish this objective, profits must increase by 8 percent during the year. Required: Compute the volume in units and the dollar sales level…

Answer 1

Question

Chapter 8, Problem 6CA

To determine

Given: J Y, president of E Co., recently read an article that claimed that at least 100 of the country’s largest 500 companies were either adopting or considering adoption of the last-in first-out (LIFO) method for valuing inventories. The article stated that the firms were switching to LIFO to:

(1) Neutralize the effect of inflation in their financial statements,

(2) Eliminate inventory profits, and

(3) Reduce income taxes.

Ms. Y wonders if the switch would benefit her company. The company has a high inventory turnover rate, and inventories represent a significant proportion of the assets. Ms. Y has been told that the LIFO system is more costly to operate and will provide little benefit to companies with high turnover. She intends to use the inventory method that is best for the company in the long run rather than selecting a method just because it is the current fad.

(a)

To explain: What “inventory profits” are and how the LIFO method of inventory valuation could reduce them to Ms. Y.

To determine

(b)

To explain: The conditions that must exist for E Co. to receive tax benefits from a switch to the LIFO method, to Ms. Y.

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Chalmers Corporation operates in multiple areas of the globe, and relatively large price changes are common. Presently, the company sells 110,200 units for $50 per unit. The variable production costs are $20, and fixed costs amount to $2,079,500. Production engineers have advised management that they expect unit labor costs to rise by 10 percent and unit materials costs to rise by 15 percent in the coming year. Of the $20 variable costs, 25 percent are from labor and 50 percent are from materials. Variable overhead costs are expected to increase by 20 percent. Sales prices cannot increase more than 12 percent. It is also expected that fixed costs will rise by 10 percent as a result of increased taxes and other miscellaneous fixed charges. The company wishes to maintain the same level of profit in real dollar terms. It is expected that to accomplish this objective, profits must increase by 8 percent during the year. Required: Compute the volume in units and the dollar sales level…

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Answer 2

Question

Chapter 8, Problem 6CA

To determine

Given: J Y, president of E Co., recently read an article that claimed that at least 100 of the country’s largest 500 companies were either adopting or considering adoption of the last-in first-out (LIFO) method for valuing inventories. The article stated that the firms were switching to LIFO to:

(1) Neutralize the effect of inflation in their financial statements,

(2) Eliminate inventory profits, and

(3) Reduce income taxes.

Ms. Y wonders if the switch would benefit her company. The company has a high inventory turnover rate, and inventories represent a significant proportion of the assets. Ms. Y has been told that the LIFO system is more costly to operate and will provide little benefit to companies with high turnover. She intends to use the inventory method that is best for the company in the long run rather than selecting a method just because it is the current fad.

(a)

To explain: What “inventory profits” are and how the LIFO method of inventory valuation could reduce them to Ms. Y.

To determine

(b)

To explain: The conditions that must exist for E Co. to receive tax benefits from a switch to the LIFO method, to Ms. Y.

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Answer 3

Question

Chapter 8, Problem 6CA

To determine

Given: J Y, president of E Co., recently read an article that claimed that at least 100 of the country’s largest 500 companies were either adopting or considering adoption of the last-in first-out (LIFO) method for valuing inventories. The article stated that the firms were switching to LIFO to:

(1) Neutralize the effect of inflation in their financial statements,

(2) Eliminate inventory profits, and

(3) Reduce income taxes.

Ms. Y wonders if the switch would benefit her company. The company has a high inventory turnover rate, and inventories represent a significant proportion of the assets. Ms. Y has been told that the LIFO system is more costly to operate and will provide little benefit to companies with high turnover. She intends to use the inventory method that is best for the company in the long run rather than selecting a method just because it is the current fad.

(a)

To explain: What “inventory profits” are and how the LIFO method of inventory valuation could reduce them to Ms. Y.

To determine

(b)

To explain: The conditions that must exist for E Co. to receive tax benefits from a switch to the LIFO method, to Ms. Y.

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Answer 4

Question

Chapter 8, Problem 6CA

To determine

Given: J Y, president of E Co., recently read an article that claimed that at least 100 of the country’s largest 500 companies were either adopting or considering adoption of the last-in first-out (LIFO) method for valuing inventories. The article stated that the firms were switching to LIFO to:

(1) Neutralize the effect of inflation in their financial statements,

(2) Eliminate inventory profits, and

(3) Reduce income taxes.

Ms. Y wonders if the switch would benefit her company. The company has a high inventory turnover rate, and inventories represent a significant proportion of the assets. Ms. Y has been told that the LIFO system is more costly to operate and will provide little benefit to companies with high turnover. She intends to use the inventory method that is best for the company in the long run rather than selecting a method just because it is the current fad.

(a)

To explain: What “inventory profits” are and how the LIFO method of inventory valuation could reduce them to Ms. Y.

To determine

(b)

To explain: The conditions that must exist for E Co. to receive tax benefits from a switch to the LIFO method, to Ms. Y.

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Answer 5

Chapter 8, Problem 6CA

To determine

Given: J Y, president of E Co., recently read an article that claimed that at least 100 of the country’s largest 500 companies were either adopting or considering adoption of the last-in first-out (LIFO) method for valuing inventories. The article stated that the firms were switching to LIFO to:

(1) Neutralize the effect of inflation in their financial statements,

(2) Eliminate inventory profits, and

(3) Reduce income taxes.

Ms. Y wonders if the switch would benefit her company. The company has a high inventory turnover rate, and inventories represent a significant proportion of the assets. Ms. Y has been told that the LIFO system is more costly to operate and will provide little benefit to companies with high turnover. She intends to use the inventory method that is best for the company in the long run rather than selecting a method just because it is the current fad.

(a)

To explain: What “inventory profits” are and how the LIFO method of inventory valuation could reduce them to Ms. Y.

To determine

(b)

To explain: The conditions that must exist for E Co. to receive tax benefits from a switch to the LIFO method, to Ms. Y.

Answer 6

Chapter 8, Problem 6CA

To determine

Given: J Y, president of E Co., recently read an article that claimed that at least 100 of the country’s largest 500 companies were either adopting or considering adoption of the last-in first-out (LIFO) method for valuing inventories. The article stated that the firms were switching to LIFO to:

(1) Neutralize the effect of inflation in their financial statements,

(2) Eliminate inventory profits, and

(3) Reduce income taxes.

Ms. Y wonders if the switch would benefit her company. The company has a high inventory turnover rate, and inventories represent a significant proportion of the assets. Ms. Y has been told that the LIFO system is more costly to operate and will provide little benefit to companies with high turnover. She intends to use the inventory method that is best for the company in the long run rather than selecting a method just because it is the current fad.

(a)

To explain: What “inventory profits” are and how the LIFO method of inventory valuation could reduce them to Ms. Y.

Answer 7

Chapter 8, Problem 6CA

To determine

Given: J Y, president of E Co., recently read an article that claimed that at least 100 of the country’s largest 500 companies were either adopting or considering adoption of the last-in first-out (LIFO) method for valuing inventories. The article stated that the firms were switching to LIFO to:

(1) Neutralize the effect of inflation in their financial statements,

(2) Eliminate inventory profits, and

(3) Reduce income taxes.

Ms. Y wonders if the switch would benefit her company. The company has a high inventory turnover rate, and inventories represent a significant proportion of the assets. Ms. Y has been told that the LIFO system is more costly to operate and will provide little benefit to companies with high turnover. She intends to use the inventory method that is best for the company in the long run rather than selecting a method just because it is the current fad.

(a)

To explain: What “inventory profits” are and how the LIFO method of inventory valuation could reduce them to Ms. Y.

Answer 8

To determine

(b)

To explain: The conditions that must exist for E Co. to receive tax benefits from a switch to the LIFO method, to Ms. Y.

Answer 9

To determine

(b)

To explain: The conditions that must exist for E Co. to receive tax benefits from a switch to the LIFO method, to Ms. Y.

Answer 10

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Ch. 8 - Prob. 1Q Ch. 8 - 2. Why should inventories be included in (a) a...Ch. 8 - 3. What is the difference between a perpetual...Ch. 8 - Prob. 4Q Ch. 8 - Prob. 5Q Ch. 8 - Prob. 6Q Ch. 8 - Prob. 7Q Ch. 8 - Prob. 8Q Ch. 8 - Prob. 9Q Ch. 8 - Prob. 10Q

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(b)

To explain: The conditions that must exist for E Co. to receive tax benefits from a switch to the LIFO method, to Ms. Y.

Chapter 8 Solutions

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(b) To explain: The conditions that must exist for E Co. to receive tax benefits from a switch to the LIFO method, to Ms. Y.

Chapter 8 Solutions

(b)

To explain: The conditions that must exist for E Co. to receive tax benefits from a switch to the LIFO method, to Ms. Y.