Question

The manager of Weiser is given a bonus based on net income before taxes. The net income after taxes is $35,700 for FIFO and $29,400 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

The manager's bonus would be $1,800 higher if FIFO is adopted instead of LIFO.

Step-by-step explanation:

To calculate the difference in the manager's bonus if FIFO is adopted instead of LIFO, we need to find the net income before taxes for both methods. Since we have the net income after taxes for both FIFO and LIFO, we can use the tax rate to find the net income before taxes.

For FIFO:

1. Net income after taxes = $35,700
2. Tax rate = 30%
3. Net income before taxes = Net income after taxes / (1 - Tax rate) = $35,700 / (1 - 0.30) = $51,000

For LIFO:

1. Net income after taxes = $29,400
2. Tax rate = 30%
3. Net income before taxes = Net income after taxes / (1 - Tax rate) = $29,400 / (1 - 0.30) = $42,000

The difference in the net income before taxes between FIFO and LIFO is $51,000 - $42,000 = $9,000. Since the manager's bonus is based on net income before taxes and the bonus rate is 20%, the manager's bonus would be $9,000 * 0.20 = $1,800 higher if FIFO is adopted instead of LIFO.