Question

Campbell Manufacturing Company (CMC) was started when it acquired $95,000 by issuing common stock. During the first year of operations, the company incurred specifically identifiable product costs (materials, labor, and overhead) amounting to $63,000. CMC also incurred $58,500 of engineering design and planning costs. There was a debate regarding how the design and planning costs should be classified. Advocates of Option 1 believe that the costs should be classified as general, selling, and administrative costs. Advocates of Option 2 believe it is more appropriate to classify the design and planning costs as product costs. During the year, CMC made 4,500 units of product and sold 3,700 units at a price of $38.00 each. All transactions were cash transactions.

Required:

a-1. Prepare an income statement and balance sheet under option 1.

a-2. Prepare an income statement and balance sheet under option 2.

b. Identify the option that results in financial statements that are more likely to leave a favorable impression on investors and creditors.

c. Assume that CMC provides an incentive bonus to the company president equal to 13 percent of net income. Compute the amount of the bonus under each of the two options. Identify the option that provides the president with the higher bonus.

d. Assume a 30 percent income tax rate. Determine the amount of income tax expense under each of the two options. Identify the option that minimizes the amount of the company’s income tax expense.

PLEASE LOOK AT NUMBERS. THE LAST PERSON GAVE ME ALL WRONG NUMBERS. THANK YOU!

Answer 1

Ans) A1 & A2

Income statement	Option 1	Option 2
Units sold	3700	3700
Sales (3700*$38)	140600	140600
less;Cost of Goods Sold( Unit product cost * units sold)	51800	99900
Gross Margin	88800	40700
less; Selling & adm Exp	58500
Net Operating Income/Loss	30300	40700

Calculation;

Unit Product cost= Total Production cost/no of produced unit

Option1= 63,000/4500= 14

Option2= 63000+58500/4500=27

Balance Sheet	Option 1	Option 2
Assets
Cash (total Liability - Inventory)	114100	114100
Inventory (unsold units * Per unit product cost)	11200	21600
Total Current Assets	125300	135700
Total Assets	125300	135700
Liabilities
Common Stock	95000	95000
Retained Earnings	30300	40700
Total Liability & Equity	125300	135700

b) As the Net Operation Income is high in case of Option B, therefore it will leave a favorable impression on investors and creditors.

c) Option 2 provides higher amount of bonus.

	Option 1	Option 2
Net Operating Income	30300	40700
Bonus @ 13%	3939	5291

d) Option 1 minimizes the amount of the company’s income tax expense.

	Option 1	Option 2
Net Operating Income	30300	40700
tax @ 30%	9090	12210