Question

Karmin manufacturing inc., (KMI), makes cars and has just decided to start manufacturing a new model, to be called Queen Herbie (QH), based on the Karman Ghia and VW bug, and is setting up a new division to make the new model. The budget for the first year for the new division follows. The two main parts of the new division will be the office administration run by Amy, and the factory plant run by Renee. Amy will have a monthly salary of $ 14,000 and the office building will be rented for a monthly rent of $ 4,000. The office and selling staff will receive a monthly salary of $ 22,000 in total and the selling staff will also receive a $ 150 commission per each car sold. There will be a shipping cost of $ 450 per car.

Since it is the first year of operations, there will be no beginning inventory, and the company is planning to produce only the units ordered, and thus there will be no ending inventory either. For simplicity, we can assume that the budgeted fixed costs for the plant will be the amounts paid out for the year and that the normal capacity for the plant will be the expected order level. The factory will be rented for $ 60,000 annually, and the equipment (shifted from other parts of KMI) will have an annual depreciation of $ 45,000. Renee’s salary for the year will be $ 152,000 and factory insurance for the year will be $ 8,000. Each unit of the new QH model will require $ 11,000 of metal, $ 2,000 of glass, and paint costing $ 800. The assembly line employees are paid by the hour $ 35 an hour, and the new QH model will require about 220 hours of labor time to assemble each car. The miscellaneous factory costs are made up of electricity and lubricants for the equipment at about $ 500 (electricity) and $ 300 (equipment lubricants) per car. The estimated sick pay and vacation pay for the assembly workers will be about $ 25,000 annually, and the wasted raw materials used in the production process should be about $ 100 per car manufactured.

The new QH model will sell for $ 34,000 each, and the estimated order quantity (the amount that is budgeted as sales for the first year) is 120 units.

Write up a budgeted income statement for the new division for the first year, using both the contribution margin format and the gross margin format.

Answer 1

Working notes: Variable Selling and administrative expense Amy salary Office building rent Office and selling salary Selling commission Shipping cost Total Selling and administrative exp Fixed $168,000 $48,000 $264,000 $168,000 $14,000*12 $48,000 $4,000*12 $264,000 $22,000*12 $18,000 120 units * $150 $54,000 120 units * $450 $552,000 $18,000 $54,000 $72,000 $480,000 Variable Factory overheads Rent Equipment depreciation Renee's salary Factory insurance Electricity Lubricants Wasted raw material Total Factory overheads Fixed $60,000 $45,000 $152,000 $8,000 $60,000 $45,000 $152,000 $8,000 $60,000 120* $500 $36,000 120* $300 $12,000 120* $100 $373,000 $60,000 $36,000 $12,000 $108,000 $265,000 Direct cost per unit Total cost Fixed Variable Direct material Metal Glass Painting Total Direct Material $11,000 $2,000) $8001 Total Units 120 120 120 $1,320,000 $240,000 $96,000 $1,656,000 $1,320,000 $240,000 $96,000 $7,700 120 $924,000 Direct labor ( 220 hours * $35) Sick pay and vacation pay Total Direct labor Total $924,000 $25,000 $949,000 $25,000 $25,000 $2,580,000 Variable Cost of goods sold Direct material Direct labor ( 220 hours * $35) Electricity Lubricants Wasted raw material Variable COGS $1,656,000 $924,000 $60,000 $36,000 $12,000 $2,688,000 $4,080,000 34,000*120 Budgeted Income Statement Contribution Margin Income Statement Sales Less: Variable cost Cost of goods sold $2,688,000 Selling and administrative expenses $72,000 Total variable cost Contribution Margin Fixed cost Manufacturing cost $290,000 Selling and administrative expenses $480,000 Total fixed cost Net Profit $2,760,000 $1,320,000 $770,000 $550,000 Budgeted Income Statement Gross Margin Format Sales Less: Cost of goods sold Gross profit Less: Operating profit Selling and administrative expenses Net Profit $4,080,000 $2,978,000 $1,102,000 $552,000 $550,000 Note: Cost of goods sold includes Direct material Direct labor Factory overheads