Question

Exercise 2 (20 points) APPLICATION 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 Fored 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). Net Sales 400,000 70,000 less : Inventory (B) 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? 3

Answer 1

1) Total goods available = Beginning inventory + Net Purchase

$ 250,000 = $ 40,000 + Net Purchase

So, Net Purchase = $ 250,000 - $ 40,000 = $ 210,000

Gross Profit = 50% of net sales

Gross Profit = 50% of $ 400,000 = $ 200,000

Gross Profit = Net sales - Cost of goods sold

$ 200,000 = $ 400,000 - Cost of goods sold

Cost of goods sold = $ 400,000 - $ 200,000 = $ 200,000

Cost of goods sold = Beginning inventory + Net purchase - Ending inventory

$ 200,000 = $ 40,000 + $ 210,000 - Ending inventory

Ending Inventory = $ 250,000 - $ 200,000 = $ 50,000

Income Statement ( Contribution format)

	Amount	Amount	Per Unit
Net Sales		$400,000	$10.00
Expenses :
Beginning inventory	$40,000
Add: Net Purchase	$210,000
Total goods available	$250,000
Less: Ending inventory	$ 50,000
Cost of goods sold	$200,000		$ 5.00
Add:Variable Expenses	$ 80,000		$ 2.00
Less: Total variable cost		$280,000	$ 7.00
Contribution margin		$120,000	$ 3.00
Less : Fixed Cost		$ 60,000	$ 1.50
Net Profit ( Before tax )		$ 60,000	$ 1.50

2) Here, the required net profit ( before tax) for next year = $ 60,000 + $ 15,000 = $ 75,000

Fixed cost remain constant at $ 60,000 in next year .

Revised contribution margin for next year = Required profit + Fixed cost = $ 75,000 + $ 60,000 = $ 135,000

Cost of goods sold for next year = Current year COGS ( 50% on sales ) + 5% increment on sales of the next year = 55% on next year sales .

Variable cost is [ $ 80,000/ $ 400,000] X 100% i. e 20% on sales

So, total variable cost = 55% + 20% = 75% on sales of the next year.

So, contribution margin = 100% - 75% = 25% on next year sales.

Revised contribution = $ 135,000

So, Break even Sales revenue($) for the next year = $ 135,000 X 100/25 = $ 540,000

Break even sales in units for the next year = $ 540,000 / $ 10.00 = 54,000 units .

Alternative (short cut method):

Break even sales in units = [Fixed cost + required net profit (BT) for next year ] / Contribution per unit

If sales per unit = $ 10.00 and revised contribution margin is 25% on sales then, revised contribution margin per unit = $ 10.00 X 25% = $ 2.50

Break even sales in units = [ $ 60,000 + $ 75,000] / $ 2.50 = $ 135,000/ $ 2.50 = 54,000 units .

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