Question

Montoure Company uses a perpetual inventory system. It entered into the following calendar-year purchases and sales transactions. (For specific identification, units sold consist of 600 units from beginning inventory, 300 from the February 10 purchase, 200 from the March 13 purchase, 50 from the August 21 purchase, and 250 from the September 5 purchase.)

Date	Activities	Units acquired at cost	Units sold at retail
Jan 1	Beginning inventory	600 units @ \(45.00 per unit
Feb 10	Purchases	400 units @ \)42.00 per unit
March 13	Purchases	200 units @ \(27.00 per unit
March 15	Sales		800 units @ \)75.00 per unit
Aug 21	Purchases	100 units @ \(50.00 per unit
Sep 5	Purchases	500 units @ \)46.00 per unit
Sep 10	Sales		600 units @ $75.00 per unit
	Total	1,800 units	1,400 units

Required

Analysis Component

5. If the company’s manager earns a bonus based on a percent of gross profit, which method of inventory costing will the manager likely prefer?

Short answer

Themanager will prefer the FIFO method of costing.

Step-by-step solution

Definition of Compensation

Compensation can be defined as the benefits provided to the employees against their services. Such compensation might be fixed, variable, or a combination of both.

Inventory Costing Method Preferred by Manager

The highest gross profit is reported under the FIFO method of inventory costing, and therefore, the manager will prefer this method only. The manager will get a higher bonus under the FIFO method because the bonus is based on gross profit percentage.