Introduction:
Merrimack Tractors and Mowers was setup in 1980 and is based out of Nashua, New Hampshire. It is a major manufacturer and seller of large commercial grass mowers. The other major players in this product category were John Deere, The Toro Company, Simplicity and Husqvarna. The company had outsourced its manufacturing to a contractor in China and was primarily dealing in machines and parts design and distribution. Hence, Merrimack can be termed as a Merchandiser rather than a Manufacturer. Merrimack had no presence outside the USA market. Even with high transportation cost of importing finished goods, Merrimack was cost competitive, due to low cost manufacturing in China. However, by 2007-2008 this cost competitiveness had eroded due to increased labour costs in China, the strengthening of the Chinese currency and increases oil price leading to higher transportation cost. In contrast, the competitors with manufacturing facilities in USA were not affected much by these factors and in fact benefited from the weakening of the dollar in their export markets.
Merrimack was listed on NASDAQ with 4000 shareholders and 25% shares owned by the Martino family. It was headed and run by Ricardo Martino of the Martino family.
Problem Description:
Merrimack had lost its cost competitiveness due to increased production costs in Asia, its manufacturing hub, which had led to decreasing trends in sales margin. Consequently, the shareholders were asking for the removal of Mr. Martino as the company’s COO
Current Method of Inventory Accounting at Merrimack:
Merrimack currently followed the LIFO method of inventory accounting on a periodic basis. This had been done so as to save income tax and preserve cash for further investments.
The LIFO (Last-In-First-Out) method of inventory accounting stipulated that the cost of goods sold be calculated based on the cost of