Compass Box Whisky Company Case Questions

Compass Box Whisky Company

1. Consider the costs in Exhibit 3b.  From a business standpoint, do these costs relate to the production of whiskey?  From an accounting standpoint, which of these (if any) would you include in inventory?
2. Compare input costs under the 2 business models.  Assume Compass Box was making Peat Monster using 12-year-old whiskey in 2007 (i.e. whisky that was new fill in 1995).

1. What would Compass Box’s input costs (per liter of alcohol) be in 2007 if they purchase the input using the current model?
2. What would the total input costs (per liter of alcohol be in 2007 if they had instead purchased the new fill whisky in 1995 and aged it themselves?

1. How would you calculate Compass Box’s cost of goods sold (i.e. would you use FIFO, LIFO, average cost or some other method)?  What are the advantages and disadvantages of each?
2. The costs in Exhibit 3a demonstrate significant volatility in whisky prices.  From a business standpoint, what are the implications of this volatility?  From an accounting standpoint, what would be the impact of the financial statements as prices rise and fall?
3. Suppose Compass Box had whisky that they had bought 6 years ago as a new fill whisky with inventoriable costs incurred to date (i.e. historic cost) of £300, completion cost of £130,  and an expected selling price of £600.  Assume that the cost to buy comparable whisky on the spot market (i.e. replacement cost) is more than £300.  What journal entries would be required if:

1. The selling price dropped to £500?
2. The selling price dropped to £400?
3. The selling price remained at £600, but the replacement cost dropped to £100?
4. The selling price dropped to £400 and the replacement cost dropped to £100?
5. The selling price previously dropped to £400 and then recovered to £650?

1. If you were John Glaser, what would you do?  Why?  How will you measure the risks and rewards?