Answer:
1. Net income decreases by $12,000
2. The amount of net income would be remains the same.
Explanation:
1. Under LIFO method
(i) Before 5,000 units purchased:
sales = 64,000 units
Cost of goods sold = Quantity × Price
= (60,000 × $18) + (4,000 × $15)
= $1,080,000 + $60,000
= $1,140,000
(ii) If 5,000 units purchased at $18 each then,
Cost of goods sold = Quantity × Price
= 64,000 × $18
= $1,152,000
As the cost of goods increases as a result there will be decrease in the net income before tax under LIFO method.
The amount of net income would be decreased by:
= $1,152,000 - $1,140,000
= $12,000
2. Under FIFO method:
(i) Before 5,000 units purchased:
sales = 64,000 units
Cost of goods sold = Quantity × Price
= (10,000 × $15) + (54,000 × $18)
= $150,000 + $972,000
= $1,122,000
(ii) If 5,000 units purchased at $18 each then,
Cost of goods sold = Quantity × Price
= (10,000 × $15) + (54,000 × $18)
= $150,000 + $972,000
= $1,122,000
As there will be no change in the cost of goods sold, so, there will be no change in the net income before tax under FIFO method.
The amount of net income would be remains the same.
