Question: 4 MacGiver Brass

MacGiver Brass is a brass plating firm with sales of $8 million and profits before taxes of $625000. MacGiver has a loan outstanding at its local bank for working capital purposes. As the loan of reviewing MacGiver’s loan application, you are charged with making a recommendation whether the $608,000 loan should be renewed for another year.

Upon reviewing MacGiver’s most recent annual report, you find the following footnote:

Under absorbed overhead of $462,000 was prorated to inventories(2/3) and cost of goods sold (1/3).

a. How should you evaluate MacGiver’s annual report in light of this footnote? In particular, how does the footnote effect your recommendation regarding the loan?

b. In preparing for your meeting with MacGiver’s president and chief financial offiver, what question do you want to ask regarding this footnote?