Effects of LIFO on Purchase Decisions The M. J. Chan Corporation is nearing the end of its first year in business. The following purchases of its single product have been made:

Units Unit Price January 1,000 $10 Total Cost $ 10,000 March 1,000 10 10,000 May 1,000 11 11,000 July 1,000 13 13,000 September 1,000 14 14,000 December 4,000 15 60,000 9,000 $118,000 Sales for the year will be 5,000 units for $120,000. Expenses other than cost of goods sold will be $30,000. The president is undecided about whether to adopt FIFO or LIFO for income tax purposes. The company has ample storage space for up to 7,000 units of inventory. Inventory prices are expected to stay at $15 per unit for the next few months. 1. What would be the net income before taxes, the income taxes, and the net income after taxes for the year under

(a) FIFO or

(b) LIFO? Income tax rates are 40%. 2. If the company sells its year-one year-end inventory in year 2 @ $24 per unit and goes out of busi- ness, what would be the net income before taxes, the income taxes, and the net income after taxes under

(a) FIFO and

(b) LIFO? Assume that other expenses in year two are $30,000. 3. Repeat requirements 1 and 2, assuming that the 4,000 units @ $15 purchased in December were not purchased until January of the second year. Generalize on the effect on net income of the tim- ing of purchases under FIFO and LIFO.