3. Dr. Colin Modella, an music history professor at the University of Arizona, supplements her income by selling cappuccino on campus to students and other faculty members when she is not teaching, doing research, creating curriculum, or attending committee meetings. She sells iced cappuccino in hot weather. Michaella has $550 invested in her cappuccino business, which consists of $100 of miscellaneous cash that she keeps in her cash drawer, plus the cappuccino machine (which originally cost $350,) and the ice shaver.
Since there is a popular football game on the Friday of the last week of August, Michaella anticipates that Friday will be a busy day. She buys an unusually large amount of materials that goes into making and selling the cappuccino for $150 and increases the cash in her cash drawer to $200 to make change. Her supplier, Mallory’s Specialty Foods, allows her to charge $100 of her total purchases, and she pays cash for the rest. Friday morning, she buys $30 for several bags of ice, and $45 for cups.
With temperatures in the 90s, Michaella sells three-quarters of her stock for $1,035 in cash. At the end of the day, she returns home with her unsold cappuccino materials (except for the unsold ice which melted) with plans to replenish her inventory, pay her supplier bill, and obtain more ice and cups for finals week.
Required
a. Prepare an income statement to reflect the results of operations for Michaella's Friday business. List any items that you found difficult to measure.
b. Evaluate Michaella's relative success in selling cappuccino.
To prepare the income statement, we need to calculate the revenue and expenses for Michaella's Friday business.
1. Revenue: Michaella sold three-quarters of her stock for $1,035 in cash. This means she sold 75% of her total stock. To calculate the total revenue, we divide the amount sold ($1,035) by the percentage sold (75%):
Revenue = $1,035 / 0.75 = $1,380
2. Cost of Goods Sold (COGS): COGS includes the cost of materials used in making and selling the cappuccino.
- Michaella buys an unusually large amount of materials for $150, which is part of the COGS.
- She also bought ice for $30 and cups for $45, which are also part of the COGS.
COGS = $150 + $30 + $45 = $225
3. Gross Profit: Gross profit is calculated by subtracting COGS from revenue.
Gross Profit = Revenue - COGS = $1,380 - $225 = $1,155
4. Operating Expenses: Operating expenses include any other expenses incurred in running the business.
- Michaella has $100 of miscellaneous cash that she keeps in her cash drawer, which is considered an operating expense.
- She also has a cappuccino machine and ice shaver, but their original cost is not relevant for calculating operating expenses.
- The supplier bill, which will be paid later, is not included in operating expenses for this income statement as it does not reflect a direct cost of the Friday business operations.
Operating Expenses = $100
5. Net Profit: Net profit is calculated by subtracting operating expenses from gross profit.
Net Profit = Gross Profit - Operating Expenses = $1,155 - $100 = $1,055
Income Statement for Michaella's Friday Business:
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Revenue: $1,380
Cost of Goods Sold: $225
Gross Profit: $1,155
Operating Expenses: $100
Net Profit: $1,055
Items Difficult to Measure:
- It is not provided how much Michaella initially invested in the cappuccino machine and ice shaver, so we cannot include the depreciation expense in the operating expenses.
- The unsold cappuccino materials are not mentioned, so we cannot determine if there was any waste or spoilage.
To evaluate Michaella's relative success in selling cappuccino, we can look at the high demand shown by the fact that she sells three-quarters of her stock on a busy day. The revenue generated ($1,380) and the net profit achieved ($1,055) indicate a positive result for the Friday business. However, without knowing the overall costs and comparing them to the revenue, it is difficult to make a comprehensive assessment.