This year , Kirby company sold 35,000 units of production at $16 per unit. Maunfactoring and selling the product required $120,000 of mixed manufacturing costs and $180,000 of fixed selling and administrative expenses. This years variable costs and expenses per unit were:
Material……………………………….....................................$4. 00
Direct Labour(paid on the basis of completed units)………….$3.00
Variable Manufacturing overhead costs……………………….$0.40
Variable selling and administrative expenses…………………$0.20
Next year the company will use new raw material that is easier to work with and cheaper than the old material. A switch the new material will decrease material costs by 60% and direct labour costs can be decreased by 40%. The new material will not affect the products quality or marketability. The next set of decisions concerns the marketing strategy to be used. Because the factory’s output is creeping up to it’s annual capacity of 40,000 units, some consideration is being given to increase the selling price and to reduce the number of units sold. At this point two strategies have been identified. Under plan 1, the company will keep the price at the current level and sell the same volume as this year. This plan increases profit because of the materials change. Under plan 2, the products price will increase by 25%, but unit sales volume will fall only 10%. Under both plan 1 and 2, all of the fixed costs and variable costs(per unit) will be exactly the same.
1. Prepare side -by -side condensed forecasted income statements showing the anticipated results of plan 1 and 2 The statement should show sales. Total fixed costs, total variable costs and expenses, income before taxes, income taxes(30% rate), and net income.
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This year , Kirby company sold 35,000 units of production at $16 per unit. Maunfactoring and selling the product required $120,000 of mixed manufacturing costs and $180,000 of fixed selling and administrative expenses. This years variable costs and expenses per unit were:
Material……………………………….....................................$4. 00
Direct Labour(paid on the basis of completed units)………….$3.00
Variable Manufacturing overhead costs……………………….$0.40
Variable selling and administrative expenses…………………$0.20
Next year the company will use new raw material that is easier to work with and cheaper than the old material. A switch the new material will decrease material costs by 60% and direct labour costs can be decreased by 40%. The new material will not affect the products quality or marketability. The next set of decisions concerns the marketing strategy to be used. Because the factory’s output is creeping up to it’s annual capacity of 40,000 units, some consideration is being given to increase the selling price and to reduce the number of units sold. At this point two strategies have been identified. Under plan 1, the company will keep the price at the current level and sell the same volume as this year. This plan increases profit because of the materials change. Under plan 2, the products price will increase by 25%, but unit sales volume will fall only 10%. Under both plan 1 and 2, all of the fixed costs and variable costs(per unit) will be exactly the same.
Required
1 Prepare side -by -side condensed forecasted income statements showing the anticipated results of plan 1 and 2 The statement should show sales. Total fixed costs, total variable costs and expenses, income before taxes, income taxes(30% rate), and net income.
To prepare the side-by-side condensed forecasted income statements, we need to analyze the information given and calculate the anticipated results for Plan 1 and Plan 2. Let's break down the calculation step by step:
Plan 1:
Sales: The sales volume remains the same as this year, which is 35,000 units. The selling price per unit is $16.
Therefore, the sales for Plan 1 can be calculated as follows:
Sales = Sales Volume x Selling Price per Unit
Sales = 35,000 units x $16 = $560,000
Total Fixed Costs: The fixed costs remain the same at $180,000.
Total Variable Costs and Expenses: To determine the variable costs and expenses, we need to calculate the material cost, direct labor cost, variable manufacturing overhead cost, and variable selling and administrative expenses per unit and multiply them by the sales volume.
Material Cost per Unit = Old Material Cost per Unit x (1 - Decrease Percentage)
Material Cost per Unit = $4.00 x (1 - 0.60) = $4.00 x 0.40 = $1.60
Direct Labor Cost per Unit = Old Direct Labor Cost per Unit x (1 - Decrease Percentage)
Direct Labor Cost per Unit = $3.00 x (1 - 0.40) = $3.00 x 0.60 = $1.80
Variable Manufacturing Overhead Cost per Unit = $0.40
Variable Selling and Administrative Expenses per Unit = $0.20
Total Variable Costs and Expenses = (Material Cost per Unit + Direct Labor Cost per Unit + Variable Manufacturing Overhead Cost per Unit + Variable Selling and Administrative Expenses per Unit) x Sales Volume
Total Variable Costs and Expenses = ($1.60 + $1.80 + $0.40 + $0.20) x 35,000 = $5.00 x 35,000 = $175,000
Income before Taxes: Income before taxes can be calculated by subtracting the Total Variable Costs and Expenses from the Sales and then subtracting the Total Fixed Costs.
Income before Taxes = Sales - Total Variable Costs and Expenses - Total Fixed Costs
Income before Taxes = $560,000 - $175,000 - $180,000 = $205,000
Income Taxes: The income tax rate is 30%. We can calculate the income taxes by multiplying the Income before Taxes by the tax rate.
Income Taxes = Income before Taxes x Tax Rate
Income Taxes = $205,000 x 0.30 = $61,500
Net Income: Net Income is the Income before Taxes minus the Income Taxes.
Net Income = Income before Taxes - Income Taxes
Net Income = $205,000 - $61,500 = $143,500
Now, let's move on to calculating the income statement for Plan 2:
Plan 2:
Sales: The sales volume will decrease by 10% from this year, which is 35,000 units. However, the selling price per unit will increase by 25%.
Therefore, the sales for Plan 2 can be calculated as follows:
Sales = Sales Volume x Selling Price per Unit
Sales = (35,000 units - (35,000 units x 0.10)) x ($16 + ($16 x 0.25)) = 31,500 units x $20 = $630,000
Total Fixed Costs: The fixed costs remain the same at $180,000.
Total Variable Costs and Expenses: We will use the same variable costs and expenses per unit as calculated for Plan 1 since they are given to be exactly the same under both plans.
Total Variable Costs and Expenses = (Material Cost per Unit + Direct Labor Cost per Unit + Variable Manufacturing Overhead Cost per Unit + Variable Selling and Administrative Expenses per Unit) x Sales Volume
Total Variable Costs and Expenses = ($1.60 + $1.80 + $0.40 + $0.20) x 31,500 = $5.00 x 31,500 = $157,500
Income before Taxes: Income before taxes can be calculated by subtracting the Total Variable Costs and Expenses from the Sales and then subtracting the Total Fixed Costs.
Income before Taxes = Sales - Total Variable Costs and Expenses - Total Fixed Costs
Income before Taxes = $630,000 - $157,500 - $180,000 = $292,500
Income Taxes: We can calculate the income taxes by multiplying the Income before Taxes by the tax rate.
Income Taxes = Income before Taxes x Tax Rate
Income Taxes = $292,500 x 0.30 = $87,750
Net Income: Net Income is the Income before Taxes minus the Income Taxes.
Net Income = Income before Taxes - Income Taxes
Net Income = $292,500 - $87,750 = $204,750
Now, we have all the information needed to prepare the side-by-side condensed forecasted income statements:
Plan 1:
Sales: $560,000
Total Fixed Costs: $180,000
Total Variable Costs and Expenses: $175,000
Income before Taxes: $205,000
Income Taxes: $61,500
Net Income: $143,500
Plan 2:
Sales: $630,000
Total Fixed Costs: $180,000
Total Variable Costs and Expenses: $157,500
Income before Taxes: $292,500
Income Taxes: $87,750
Net Income: $204,750