Inventory Write-downs

Storage Technology Corporation (Storage Tek) is a manufacturer of computer storage devices. Storage Tek continually modifies its existing products and develops new ones. These improvements permit larger amounts of data to be stored and accessed more quickly. One of Storage Tek’s new products was called Iceberg. An Iceberg system comprised many small storage devices designed to work together. Storage Tek was quite optimistic about Iceberg’s future success. Because Iceberg held clear advantages over other systems that Storage Tek sells, Storage Tek needed to reduce the selling price of these other systems. Because of this, Storage Tek must also ensure that the recorded value of its inventory is not overstated. In fact, in the first quarter of 1994, shortly before Iceberg was marketed to the public, Storage Tek reduced the recorded value of its older storage systems by $7,500,000.Write-downs such as this are rather common in industries that experience rapid technological change. For the first quarter in 1994, Storage Tek reported the following:

Revenue	$335,623,000
Cost of goods sold	$234,315,000

Assume that the $7,500,000 charge was included in cost of goods sold.

Required

a. What effect did the write-down have on

i. gross profit?

ii gross profit percentage?

b.Under these circumstances, what issues will be of concern to Storage Tek’s managers? What recommendations would you make to Storage Tek? Justify your recommendations.