Savannah, plc is a manufacturing company that manufactures and sells a single product. Unit sales for each of the four quarters of 2019 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 non-manufacturing costs of £0.35 per unit. Savannah will incur fixed manufacturing costs of £720,000 and fixed non-manufacturing 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 2019, assuming actual sales are as projected and employing (a) the integral approach to interim financial reporting and (b) the discrete approach to interim financial reporting. Ignore income taxes.
Analysis
Compute Savannah's profit margin on sales for each of the four quarters of 2019. 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
Should Savannah implement the integral or discrete approach under IFRS? Do you agree? That is, explain the conceptual rationale behind the integral approach to interim financial reporting.