Q1) In 2008, McQueen Company bought from Chris Padgett the right to be sole distributor in western states of product called Halenol. In payment, McQueen agreed to pay Padgett 20% of gross profit recognized from sale of Halenol in 2009.
McQueen utilizes periodic inventory system and LIFO inventory method. Late in 2009, information available about Halenol inventory is given below:
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Beginning inventory, 1/1/09 (10,000 units @ $30)
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$300,000
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Purchases (40,000 units @ $30)
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1,200,000
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Sales (35,000 units @ $60)
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2,100,000
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By the end of year, buying price of Halenol had risen to $40 per unit. On December 28, 2009, three days before year-end, McQueen is in position to buy 20,000 extra units at the $40 per unit price. Supplier guarantees units will leave its warehouse on December 30, FOB (free on board) shipping point, and will take 3 days to reach McQueen's warehouse. Due to market demand for Halenol, McQueen can simply pass on increased cost to its customers by increasing its prices in 2010 to $80 per unit. Inventory on hand at December 28 is 15,000 units and is enough to meet sales demand for next 6 months. Company does not expect purchase price of Halenol to change during 2010.
a. Find out effect of purchase of extra 20,000 units of Halenol and payment due Chris Padgett.
b. describe briefly ethical dilemma that McQueen faces in deciding whether or not to buy extra units.
c. prepare suggestion as to how McQueen and Padgett could have written contract to avoid this ethical dilemma.
d. What does FOB shipping point mean to McQueen's inventory records? What would be the effect if shipment was FOB destination?