Question

I will not give credit for any unsupported answer -- even if it is correct!!. All cash flows are end-of-period unless otherwise stated .

Problems 1 and 2 relate to this information :

The current monthly income statement for JRT, Inc., represents the results of selling 8,000 coffee mugs: Sales (revenue) $56,000 Cost of goods sold (33,000) Gross margin $23,000 S & A expenses (16,000) Income before taxes $ 7,000 Income taxes (@ 30%) (2,100) Net income $ 4,900 Cost of goods sold included fixed manufacturing costs of $5,000, while selling and administrative expenses (“S & A expenses”) included $4,000 of fixed costs. Sales commissions amounting to $0.40 per coffee mug were also included in S & A expenses.

1. How many coffee mugs would JRT need to sell to earn a monthly net income of $7,000?

2. JRT received a special order for 3,000 coffee mugs from the Lyric Opera of Chicago (Lyric). JRT would not have to pay a sales commission on these mugs, but would have to place a special “Lyric” design on each mug at a cost of $0.50 per mug. In addition, the fixed cost of setting up this order would amount to $1,900. If the Lyric agreed to pay only $6.00 per mug, what would be the effect on JRT’s monthly net income if they accepted this order?

Answer 1

solution-1)

From the given details, we have the following calculations

Given:

(i) Sales revenue from selling 8000 coffee mugs = $56,000

Selling price of one coffee mug = $7

(ii) Cost of goods sold includes a fixed cost of $5,000.

Cost of goods sold for 8000 coffee mugs = $33,000 - $5,000 = $28,000

(iii) S & A Expenses included fixed cost of $4,000.

S & A Expenses (including sales commissions) for 8000 coffee mugs = $16,000 - $4,000 = $12,000

Total variable cost for 8000 coffee mugs = $28,000 + $12,000 = $40,000

Variable cost for each coffee mug =

Calculating backwards to arrive at the number of mugs to be sold.

Income taxes = 30% of Net income before taxes

Net profit = 70% of net income before taxes

From our problem,

70% of Net income before taxes = 7000

Net income before taxes = ............................(a)

Now, let "X" be the number of coffee mugs sold.

Sales revenue = 7X.........................(b)

Cost of goods sold = Fixed cost + Variable cost = 5000 + Variable Cost of goods sold

S & A Expenses = Fixed cost + Variable Cost = 4000 + Variable S&A Expenses

Total Cost (including Cost of goods sold and S&A Expenses) = 9000 + Total variable cost

= 9000 + 5X.......................(c)

(Where variable cost for each coffee mug = $5, as calculated above)

(b) - (c) gives us the value of net income before taxes.

Equating and solving, we have

(b) - (c) = (a)

We can cross check our answer from the following calculations