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Dearborn Mulch sells bulk garden mulch to local landscaping firms by the cubic yard, delivering with its truck. It buys the mulch by the
Dearborn Mulch sells bulk garden mulch to local landscaping firms by the cubic yard, delivering with its truck. It buys the mulch by the cubic yard in truckloads from companies that produce it. It is a very profitable family-owned business run by its matriarch, Denise, who plans to keep the business until she retires in 15 years. It is in solid financial shape but may need to borrow from the bank for some short term needs. Its income tax rate is 21%. The business' fiscal year is drawing to an end, and Denise has a decision to make and wants your advice. She plans to buy 25,000 cubic yards of mulch as a special purchase at $19 per cubic yard (the regular market price is $25), and must choose whether to get it delivered just before or just after year-end, which is at the end of this month. She heard from a friend that he had saved money by doing this. Mulch inventory information is as follows: Beginning of year amount: 20,000 cubic yds with cost of $10/cubic yard Purchases so far this year: 55,000 cubic yds at $20/cubic yard under a long term contract. Sales during the year: 60,000 cubic yards at prices ranging from $30-40 per cubic yard, delivered. Selling prices are expected to remain at the high end of the current price range. She thinks they use the FIFO method for costing inventory, but isn't sure, and also wonders if she should change to some other method. She is looking for a new financial/accounting advisor and is considering you. Required: Write a concise memo to her addressing her concerns (she likes people who get right to the point). Start by explaining what you think her objectives are and why, and how this guides your approach to deciding which method to use and whether to make the special purchase. Next, provide supporting calculations of Cost of Goods Sold for FIFO and LIFO under both scenarios: i.e., if she receives the special purchase before or after year-end. Finish by recommending whether she should make the purchase and what method she should use.
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