Question: You work for a refinery company. During the year, the price of a barrel of oil increased from $40 to $50. The cost of the inventory of oil at the beginning of the year is $40 or less per barrel.
Suppose you are the purchasing manager of the refinery company. Your performance evaluation is based on the gross margin on the oil products produced and sold during the year. On the last day of the year, you are contemplating the purchase of additional oil at $50 per barrel. Are you more likely to purchase additional oil if the company uses the FIFO or LIFO method for its inventories? Briefly explain.
Suppose you are the CFO of the refinery company. Your primary objective is to minimize the present value of future income tax outflows. Are you more likely to want the purchase of additional oil if the company uses the FIFO or LIFO method for its inventories? Briefly explain.