The retail outlet of Ft. Worth Boots suffered extensive smoke and water damage and a small amount
Question:
The retail outlet of Ft. Worth Boots suffered extensive smoke and water damage and a small amount of fire damage on September 10. The company carried adequate insurance, and the insurance company's claims adjuster appeared the same day to inspect the damage. After completing his survey, the adjuster agreed with Amy Harris, the store's owner, that the inventory could be sold to a company specializing in fire sales for about one fourth of its cost. The adjuster offered Ms. Harris \(\$ 112,500\) in full settlement for the damage to the inventory. He suggested that the offer be accepted and said he had authority to deliver at once a check for that amount. He also pointed out that a prompt settlement would provide funds to replace the inventory in time for the store to participate in the Christmas shopping season.
Ms. Harris felt the loss might exceed \(\$ 112,500\), but she recognized that a timeconsuming count and inspection of each item in the inventory would be required to establish the loss more precisely. She was anxious to get back into business before the Christmas rush, the season making the largest contribution to annual net income, and was reluctant to take the time for the inventory count. Yet, she was also unwilling to take a substantial loss on the insurance settlement.
Ms. Harris asked for and received a one-day period in which to consider the insurance company offer, and immediately went to her records for the following information:
a.
b. On February 15 , the remaining inventory of winter footwear was marked down from \(\$ 72,000\) to \(\$ 54,000\) and placed on sale in the annual end-of-thewinter-season sale. Three fourths of the boots were sold. The markdown on the remainder was canceled, and the boots were returned to their regular retail prices. (A markdown cancellation is subtracted from a markdown, and a markup cancellation is subtracted from a markup.)
c. In June, a special line of imported Italian boots proved popular, and 84 pairs were marked up from their normal \(\$ 220.50\) retail price to \(\$ 243.00\) per pair. Sixty pairs were sold at the higher price; and on July 20, the markup on the remaining 24 pairs was canceled and they were returned to their regular \(\$ 220.50\) price.
d. Between January 1 and September 10, markdowns totaling \(\$ 8,100\) were taken on several odd lots of shoes. Recommend whether or not you think Ms. Harris should accept the insurance company's offer. Back your recommendation with figures.
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