The controller of Navar Corporation wants to issue to stockholders quarterly income statements that will be predictive of expected annual results. He proposes allocating all fixed costs for the year among quarters in proportion to the number of units expected to be sold in each quarter, stating that the annual income can then be predicted through use of the following equation: annual income \(=\) quarterly income \(\times 100 \% \div\) percentage of unit sales applicable to quarter Navar expects the following activity for the year.

Required:

Ignore income taxes in answering the following questions.

a. Assuming that Navar's activities do not vary from expectations, will the controller's plan achieve his objective? If not, how can it be modified to do so? Explain and give illustrative computations.

b. How should the effect of variations of actual activity from expected activity be treated in Navar's quarterly income statements?

c. What assumption has the controller made in regard to inventories? Discuss.

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Units Average per Unit Total (in $1,000s) Sales revenue: First quarter 500,000 $2.00 $1,000 Second quarter 100,000 1.50 150 Third quarter 200,000 2.00 400 Fourth quarter 200,000 2.00 400 1,000,000 Costs to be incurred: Variable: Manufacturing Selling and administrative Fixed: Manufacturing Selling and administrative Income before income taxes $0.70 700 0.25 250 $0.95 950 380 220 600 $400