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.