ACT 205 Lecture Notes - Lecture 25: Net Income, Income Statement, Variable Cost
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Basic information | |||
Exhibit 1 Hallstead Jewelers | |||
Income Statements for YearsEnded January 31 (thousands of dollars) | |||
2003 | 2004 | 2006 | |
Sales | $9,000,000 | $8,000,000 | $11,000,000 |
Cost of goods sold | 4,050,000 | 3,600,000 | 4,950,000 |
Gross margin | $4,950,000 | $4,400,000 | $6,050,000 |
Expenses | |||
Selling expense | |||
Salaries | 2,021,000 | 2,081,000 | 4,085,000 |
Commissions | 450,000 | 400,000 | 550,000 |
Advertising | 254,000 | 250,000 | 257,000 |
Administrative expenses | 418,000 | 425,000 | 535,000 |
Rent | 420,000 | 420,000 | 840,000 |
Depreciation | 84,000 | 84,000 | 142,000 |
Miscellaneous expenses | 53,000 | 93,000 | 122,000 |
Total expenses | $3,700,000 | $3,753,000 | $6,531,000 |
Net income | $1,250,000 | $647,000 | $(481,000) |
Exhibit 2 Hallstead JewelersOperating Statistics | |||
2003 | 2004 | 2006 | |
Sales space (square feet) | 10,000 | 10,000 | 15,000 |
Sales per square foot | $900 | $800 | $733 |
Sales tickets | 5,000 | 5,000 | 7,000 |
Average sales ticket | $1,800 | $1,600 | $1,571 |
Assumptions:
Sales price per ticket = $1,572
Variable cost per unit = $786 (cost of goods sold of $707 +Sales commissions of $79)
Complete the table below:
Alternative #1 | Per unit | Total | Per unit | Total |
# of sales tickets | 7000 | |||
Selling price per ticket | $1,572 | $11,000,000 | ||
Variable cost per ticket | $786 | $5,500,000 | ||
Contribution margin per ticket | $786 | $5,500,000 | ||
Total fixed costs | 5,981,000 | |||
Net income | $(481,000) | |||
Change in net income if accept alternative | ||||
Breakeven point in units | 7,610 |
Review of Question #4 requirements. Increase advertisingby $20,000, increase sales revenue (volume) by 2%.
For each question, answer yes or no for each piece ofinformation listed.
Information | For this alternative only, is there a change in this item thataffects calculation of net income? Yes or No | For this alternative only, is there a change in this item thateffects the calculation of the new breakeven point? Yes or No |
Selling price per unit | ||
Variable cost per unit | ||
Total fixed costs | ||
Net income | ||
Sales volume |
Complete the table below:
Alternative #3 | Per unit | Total | Per unit | Total |
# of sales tickets | 7000 | |||
Selling price per ticket | $1,572 | $11,000,000 | ||
Variable cost per ticket | $786 | $5,500,000 | ||
Contribution margin per ticket | $786 | $5,500,000 | ||
Total fixed costs | 5,981,000 | |||
Net income | $(481,000) | |||
Change in net income if accept alternative | ||||
Breakeven point in units | 7,610 |
Alternatives | Change in Net Income | New Breakeven point in units | Change in Breakeven point in units |
#1 Decrease SP, Increase sales volume | |||
#2 Eliminate sales commissions | Increases by $550,000 | 6,914 | Decreases by 696 |
#3 increase Fixed costs by $20,000 to get increase of 2% salesrevenue (volume) |
Overview: Classifying a companyâs costs allows for an in-depthanalysis of the impact that changes in output have on revenues,costs, and net income or net loss. A cost-volume-profit (CVP)analysis will be completed in order to determine the breakevenpoint. Relevant costs will be used to prepare a flexible budget.Additionally, an appropriate costing system should be selected andthe choice should be substantiated with reasonable rationale.Finally, a memo should be prepared for management that summarizesthe results of the quantitative analysis and makes recommendationsfor an optimal costing system to be ethically used by key decisionmakers. For Milestone One, you will use the MDE ManufacturingBudget (Table I) to analyze costs, contribution margin, andbreakeven point for the bird feeder division of the company. In Tab1 of your Student Workbook, classify costs as either product orperiod costs. Briefly explain the difference between the types ofcosts. Then, analyze the actual costs and, using Tab 2 of yourStudent Workbook, complete a cost-volume-profit analysis todetermine how many bird feeders must be sold at the current costand sales price level to earn a 10% profit and how much the salesprice would have to increase to earn a 10% profit at the same costand sales volume level. Submit the Student Workbook with Tabs 1 and2 completed with your cost calculations and a 1â2 page Worddocument that explains the implications of your findings andaddresses all of the critical elements in Section I.
I. Salesand Manufacturing Expenses: Budget and Actual (2014)
You will use this table to complete Milestones One and Two.
Budget ($) | Actual ($) | |
Sales | 1,050,000 | 991,700 |
Expenses | ||
Materials â Cedar | 225,000 | 248,160 |
Materials â Plastic | 37,500 | 37,741 |
Factory Worker Labor | 300,000 | 332,760 |
Materials â Indirect | 3,000 | 2,585 |
Factory Depreciation | 78,000 | 78,000 |
Factory Utilities | 12,000 | 12,000 |
Factory Maintenance and Repairs | 5,000 | 4,500 |
Shipping ($2.25/each) | 112,500 | 105,750 |
Sales Commissions ($2.00/unitsold) | 100,000 | 94,000 |
Office Rent | 12,000 | 12,000 |
Advertising | 20,000 | 20,000 |
Liability insurance | 5,000 | 5,000 |
Office Depreciation | 1,000 | 1,000 |
Office Salaries | 48,000 | 48,000 |
Total Expenses | 959,000 | 1,001,496 |
II. Contribution Margin: Static Budget and Actual Results (2014)
You will use this table to complete Milestone Two.
Actual Results | Static Budget Amount | |
Units Sold | 47,000 | 50,000 |
Revenues ($) | 991,700 | 1,050,000 |
Manufacturing Costs ($) | ||
Variable | 621,246 | 565,500 |
Fixed | 94,500 | 95,000 |
Gross Margin | 275,954 | 389,500 |
Milestone One,Part I | ||
Product Costs | ||
Period Costs | ||
Totals | Totals | ||||||||||
Budget | Actual | ||||||||||
Sales Price per Unit | |||||||||||
Variable Costs | |||||||||||
Materials - Cedar | |||||||||||
Materials - Plastic | |||||||||||
Factory Worker Labor | |||||||||||
Materials - Indirect | |||||||||||
Shipping ($2.25/ea) | |||||||||||
Sales Commissions ($2/unit sold) | |||||||||||
Variable Cost per Unit | |||||||||||
Contribution Margin | |||||||||||
Fixed Costs | |||||||||||
Factory Depreciation | |||||||||||
Factory Utilities | |||||||||||
Factory Maintenance and Repairs | |||||||||||
Office Rent | |||||||||||
Advertising | |||||||||||
Liability Insurance | |||||||||||
Office Depreciation | |||||||||||
Office Salaries | |||||||||||
Total Fixed Costs | |||||||||||
Using Budgeted Amounts | |||||||||||
Breakeven Point - | Breakeven Point - | ||||||||||
Using Actual Amounts | Units at Current Sales Price | ||||||||||
+ 10,000 profit | |||||||||||
Using actual amounts | New Contribution Margin | ||||||||||
+ 10,000 profit | Current Variable Costs | ||||||||||
New Sales Price |