Question: Accounting, Analysis, and Principles
Savannah, Inc. is a company that manufactures and sells a single product. Unit sales for each of the four quarters of 2014 are projected as follows.
Quarter Units
First 80,000
Second 150,000
Third 550,000
Fourth 120,000
Annual Total 900,000
Savannah incurs variable manufacturing costs of $0.40 per unit and variable nonmanufacturing costs of $0.35 per unit. Savannah will incur fixed manufacturing costs of $720,000 and fixed nonmanufacturing costs of $1,080,000. Savannah will sell its product for $4.00 per unit.
Accounting: Determine the amount of net income Savannah will report in each of the four quarters of 2014, assuming actual sales are as projected and employing the integral approach to interim financial reporting. (Ignore income taxes.)
Analysis: Compute Savannah's profit margin on sales for each of the four quarters of 2014 under both the integral and discrete approaches. What effect does employing the integral approach instead of the discrete approach have on the degree to which Savannah's profit margin on sales varies from quarter to quarter?
Principles: Explain the conceptual rationale behind the integral approach to interim financial reporting.