Question

Aloha Company uses a perpetual inventory system. It entered into the following calendar-year purchases and sales transactions. (For specific identification, the May 9 sale consisted of 80 units from beginning inventory and 100 units from the May 6 purchase; the May 30 sale consisted of 200 units from the May 6 purchase and 100 units from the May 25 purchase.)

Date	Activities	Units acquired at cost	Units sold at retail
May 1	Beginning inventory	150 units @ \(300.00 per unit
May 6	Purchase	350 units @ \)350.00 per unit
May 9	Sales		180 units @ \(1,200.00 per unit
May 17	Purchase	80 units @ \)450.00 per unit
May 25	Purchase	100 units @ \(458.00 per unit
May 30	Sales		300 units @ \)1,400.00 per unit
		680 units	480 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

The manager will prefer theFIFO method.

Step-by-step solution

Definition of Profit Based Compensation

Profit-based compensation can be defined as the compensation method under which the company managers are provided a salary along with a portion of profit depending upon the performance.

The method preferred by manager

The manager will prefer the FIFO method because the business entity is generating the highest gross profit under this method only. The manager will get higher compensation when the FIFO method is selected for inventory valuation.