Three Little Pigs Case Study

Register to read the introduction… Three Little Pigs, Inc. (PIGS), a public entity, is a vertically-integrated provider of pork products to the wholesale and retail food service and institutional markets in the United States. The Company produces approximately 4.1 million hogs per year and processes the majority of the hogs in its own facilities. The Company also sells a portion of the hogs produced (live hogs) to outside third parties. PIGS does not have any firm commitments to sell live hogs to third parties, nor does it hedge its live hogs through commodity futures contracts. There are …show more content…
The cost of producing a hog is currently $38/cwt ($38 per 100 pounds). As a result, the live hogs that are ready for sale are carried at approximately $38/cwt. The carrying cost for developing animals, at September 30, 2002, varies based on the stage of production (which lasts approximately six months). For example, the average carrying costs per cwt of developing animals to be sold to third parties, classified by month in which maturity of the animal is expected, are as follows: Month of Maturity Carrying cost* October 2002 …………………………….$31 November 2002 ………………………….$23 December 2002 ………………………….$16 January 2003 …………………………….$10 February 2003 …………………………….$5 March 2003 ……………………………….$3 *All pools of developing animals are expected to have a carrying cost of $38/cwt at maturity Developing animals that are in their second month of development (i.e. will come to market in January 2003) currently have an average carrying cost of $10/cwt, which is expected to increase to $38/cwt at maturity. The futures prices, at September 30, 2002, for lean hogs/cwt are as follows: October 2002 ……………………………$29 November 2002 …………………………$30 December 2002 ………………………… $33 January 2003 …………………………… $37 February 2003 …………………………...$42 March 2003 ……………………………...$45 Despite the fact that current spot market prices for lean hogs are below the Company’s cost, …show more content…
More specifically, how should management evaluate impairment? i) Should inventory be evaluated for impairment under the lower of cost or market method on a total inventory basis? ii) Should inventory be evaluated for impairment under the lower of cost or market method by inventory category, e.g., processed pork products, live hogs, and developing animals? iii) Should inventory be evaluated for impairment under the lower of cost or market method based on end product category, e.g., developing animals and live hogs to be processed internally are aggregated with processed pork products to comprise one group and developing animals and live hogs to be sold to third parties would be aggregated to comprise another group? iv) Should inventory be evaluated for impairment under the lower of cost or market method on an individual basis to the extent possible, e.g., at the individual hog level? v) Should inventory be evaluated for impairment on some other basis not described