An annual report of Standard Oil Company (Indiana) contained the following note:

Required: 1. Explain why the reduction in inventory quantity increased after-tax earnings (net income) for Standard Oil. 2. If Standard Oil had used FIFO, would the reductions in inventor) quantity during the two years have increased after lax earnings? Explain.

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During this year and last year, the company reduced certain inventory quantities that were val- ued at lower LIFO costs prevailing in prior years. The effect of these reductions was to in- crease aftertax earnings this year by $71 million, or S0.24 per share, and $74 million, or $0.25 per share last year.