Question

The manager of Marigold is given a bonus based on net income before taxes. The net income after taxes is $50490 for FIFO and $40200 for LIFO. The tax rate is 30%. The bonus rate is 20%. How much higher is the manager's bonus if FIFO is adopted instead of LIFO?

Answer 1

$2,058

Step-by-step explanation:

the bonus when FIFO method is used = $50,490 x 20% = $10,098

the bonus when LIFO method is used = $40,200 x 20% = $8,040

the difference = $10,098 - $8,040 = $2,058

First in. first out (FIFO) method assigns cost of goods sold based on the price of the oldest units purchased, while last in, first out (LIFO) assigns cost of goods sold based on the price of the last units purchased. When the cost of merchandise increases during the year, FIFO method will result in lower COGS and higher net income.