Question

Exercise 1 Faulty Products Inc. expects to incur into the following expenses in 2018: Direct materials (variable) Direct labor (variable) Manufacturing overhead (fixed) 12,400 9,800 C 36,600 . Selling and advertising costs (variable) 6,900 Selling and marketing costs (fixed) 12,000 Other operating expenses (fixed) 140,000 6,000 . Income tax expense 30% of pre-tax income . . Interest expenses During the year, the company plans to manufacture 2,450 units of finished goods and to sell 2,315 units at 95 each, The company also distributes 22 units of products for promotion. At the end of the year, the company believes that 25% of sales will not be collected yet, given that accounts receivable at that date usually represent 90 days of sales. The company has the policy of calculating a 7.5% allowance for doubtful accounts on its accounts receivable (not included in the costs listed above). Depreciation and amortization charges represent 20% of Manufacturing overhead, 5% of fixed Selling and marketing expenses, and 10% of Other operating expenses. Required: 1. Prepare the income statement using the cost of goods sold format, clearly showing the EBIT; 2. Prepare the income statement using the total output format, clearly showing the EBITDA and the EBIT 3. Prepare the contribution margin income statement, using both the cost of goods sold and 4. Determine the break-even point in units and the margin of safety at the current level of sales. the total output format;

Answer 1

1	Amount in USD
	Income statement
	Sales	219925
	Cost of Goods sold	58800
	Gross Profit	161125	73%	Contribution margins
	Selling and advert cost	6900
	Selling and marketing cost	12000
	Other operating expense	140000
	Doubtful debts	4,124
	Depreciation	21960
	EBIT	(23,859)
	Interest	6,000
	EBT	(29,859)
	Tax	0
	EAT	(29,859)
	Cost of goods sold
	Direct material	12400
	Direct labor	9800
	Manufacturing overhead	36600
		58800
	Doubtful debts
	Sales	219925
	25% outstanding	54,981
	7.5% will be doubtful	4,123.59
	Depreciation
	Manufacturing overhead	7360	20%
	Selling and admin cost	600	5%
	Operating expenses	14000	10%
		21960
2	Income statement	Amount	Amount/unit
	Sales	219925	95.00
	Cost of Goods sold	58800	25.40
	Gross Profit	161125	69.60
	Selling and advert cost	6900	2.98
	Selling and marketing cost	12000	5.18
	Other operating expense	140000	60.48
	Doubtful debts	4,124	1.78
	EBDITA	(1,899)	(0.82)
	Depreciation	21960	9.49
	EBIT	(23,859)	(10)
	Interest	6,000	2.59
	EBT	(29,859)	(13)
	Tax	0
	EAT	(29,859)	(13)
4		Amount/unit	Units	Amount
	Sales	95.00	2776	263,673	65,918	4,943.86
	Cost of Goods sold	25.40	2776	70,498
	Gross Profit	69.60		193,175
	Selling and advert cost	2.98	2776	8,273
	Selling and marketing cost	4.32	2776	12,000
	Other operating expense	50.44	2776	140,000
	Doubtful debts	1.78	2776	4,944
	EBDITA	10.07		27,958
	Depreciation	7.91	2776	21,960
	EBIT	2.16		5,998
	Interest	2.16	2776	6,000
	EBT	(0.00)		(2)