Question

1. The accounting department has rushed the following Income Statement Report to you. As you are about to present the figures, you notice a page is missing, but the information provided contains the following: Net Sales, $400,000; Total Goods Available, $250,000; Inventory (beginning), $40,000; Variable Expenses, $80,000 and Fixed Costs, $60,000. Gross Margin is fifty percent of Net Sales. The boss has asked you for an Income Statement showing “All Major” summary performance category figures contained in a marketing income statement including: Total Cost of Goods Sold, Contribution Margin and Net Profit (BT). Prepare the Income Statement you would present. The price of the product is $10.00. (You must show all formulas and calculations).

2. Assume given the information provided above that the boss anticipates the company’s Total Cost of Goods Sold to increase by five percent of total sales next year and that the firm wants to increase Net Profit (BT) by 15,000. What is the new Breakeven figure in units?

Answer 1

Ans:

1) Ans:

Calculation of Closing Inventories

It is given in the question, that Gross Margin= 50% of Net Sales

= 50% of 400000= $ 200,000

Particulars	Amount ($)
Total Goods Available	250,000
Add: Gross Margin	200,000
Less: Net Sales	400,000
Closing Inventories	50,000

Calculation of Cost of Goods Sold

Cost of Goods Sold= Total Goods Available - Closing Inventories= 250,000-50,000= $ 200,000

Income Statement

Particulars	Amount ($)
Net Sales	400,000
Less: Cost of Goods Sold	200,000
Gross Profit	200,000
Less: Variable Expenses	80,000
Contribution (Margin)	120,000
Less: Fixed Expenses	60,000
Net Profit Before Tax	60,000

Note:

1. It is assumed that Total Goods Available are inclusive of Opening Inventories

2. An alternative to calculate Cost of Goods Sold is given below:

We know that Gross Margin is 50% of Net Sales that is 50% of the Selling Price

Thus, if the Selling Price is 10, Gross Margin = .50*10 = 5

Thus Cost of the Product = Selling Price- Gross Margin= 10-5= 5

No. of Units Sold= Net Sales/Selling Price= 400,000/10= 40,000 units

Thus, Total Cost of Goods Sold = Total Units Sold* Cost of Product= 40,000*5= 200,000

2)

Sales = $400,000

Selling price per unit = $10

Number of units sold = Sales/Selling price per unit

= 400,000/10

= 40,000

Cost of goods sold = $200,000

Cost of goods sold per unit = Cost of goods sold/Number of units sold

= 200,000/40,000

= $5

Variable expense per unit = Variable expenses/Number of units sold

= 80,000/40,000

= $2

Cost of goods sold in the next year = 5 x 105%

= $5.25

Variable cost per unit in the next year = 5.25 + 2

= $7.25

Unit Contribution margin = Unit Selling price – Unit Variable cost

= 10 - 7.25

= $2.75

            Break even point = Fixed cost/Contribution margin per unit

= 60,000/2.75

= 21,818 units

Hence, in the next year, 21,818 units must be sold to break even.