Question

Lanier Company began operations on January 1, 2012, and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed:

Final Inventory 2012 2013
FIFO $320,000 $360,000
LIFO 240,000 300,000
Net Income (computed under the FIFO method) 500,000 550,000
Based upon the above information, a change to the LIFO method in 2013 would result in net income for 2013 of
a. $490,000.
b. $550,000.
c. $570,000.
d. $610,000.

Answer 1

The firm's accounting profit is calculated by subtracting the total expenses from the sales revenue. With expenses of $950,000 and sales revenue of $1 million, the accounting profit would be $50,000.

Step-by-step explanation:

The question pertains to the determination of a firm's accounting profit based on its sales revenue and expenses, including labor, capital, and materials. To calculate accounting profit, we deduct the total expenses from the sales revenue. In this scenario, the firm's sales revenue was $1 million. The total expenses, which include $600,000 for labor, $150,000 for capital, and $200,000 for materials, amount to $950,000. Hence, the firm's accounting profit is the sales revenue minus these combined expenses.

Accounting profit = Sales revenue - (Labor costs + Capital costs + Materials costs)
Accounting profit = $1,000,000 - ($600,000 + $150,000 + $200,000)
Accounting profit = $1,000,000 - $950,000
Accounting profit = $50,000