Assume Sonics Inc., from the prior exercise, uses LIFO with the periodic inventory system. Thus the LIFO cost of ending inventory at year 1 of 150 units is $1,600 (100 @ $10 + 50 @ $12). Suppose in year 2, Sonics reports the following purchases and sales:

Purchases Units Unit Cost/Price Total

June 100 $17 $1,700

Sales

July 200 $30 $6,000

a. Calculate taxable income and taxes payable (again assuming Sonics faces a marginal tax rate of 35%) for year 2.

-How many more units did Sonics sell than purchase?

-What is the difference in the unit cost and latest purchase price for each of these units?

b. Instead of purchasing 100 units in June, Sonics purchased 110 units. Recalculate taxable income and taxes payable.

c. Instead of purchasing 100 units in June, Sonics purchased 90 units. Recalculate taxable income and taxes payable.

d. How many units should Sonics have purchased to avoid dipping into earlier layers of inventory?

e. Do you notice any opportunities for Sonics Inc. to smooth reported net income (by varying the amount purchased relative to sales)? Are there any costs associated with this strategy? Does FIFO offer the same opportunities?

f. Suppose the top managers of Sonics are compensated, in part, by a bonus linked to reported net income. What inventory costing method might you expect the managers to favor? What costs to the firm arise from this choice?