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MANAGERIAL accounting
WHITNEY COMPANY
Income Statement
For the Year Ended December 31
Sales (45,000 units at $10 per unit) . . . . . . . . . . . $450,000
Less cost of goods sold:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $90,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,300
Manufacturing overhead . . . . . . . . . . . . . . . . . 98,500 266,800
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183,200
Less operating expenses:
Selling expenses:
Variable:
Sales commissions . . . . . . . . . . . . . . . . . . $27,000
Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . 5,400 32,400
Fixed (advertising, salaries) . . . . . . . . . . . . . 120,000
Administrative:
Variable (billing and other) . . . . . . . . . . . . . . 1,800
Fixed (salaries and other) . . . . . . . . . . . . . . . 48,000 202,200
Net operating loss . . . . . . . . . . . . . . . . . . . . . . . . $ (19,000)
All variable expenses in the company vary in terms of unit sold, except for sales commissions,
which are based on sales dollars. Variable manufacturing overhead is 30 cents per unit. There were no beginning or ending inventories. Whitney Company’s plant has a capacity of 75,000 units per year.
The company has been operating at a loss for several years. Management is studying several possible courses of action to determine what should be done to make next year profitable. Required:
1. Redo Whitney Company’s income statement in the contribution format. Show both a Total column and a Per Unit column on your statement. Leave enough space to the right of your numbers to enter the solution to both parts of (2) below.
2. The president is considering two proposals prepared by members of his staff:
a. For next year, the vice president would like to reduce the unit selling price by 20%. She is certain that this would fill the plant to capacity.
b. For next year, the sales manager would like to increase the unit selling price by 20%, increase the sales commission to 9% of sales, and increase advertising by $100,000. Based on marketing studies, he is confident this would increase unit sales by one-third. Prepare two contribution income statements, one showing what profits would be under the vice president’s proposal and one showing what profits would be under the sales manager’s proposal. On each statement, include both Total and Per Unit columns (do not show per unit data for the fixed costs).
3. Refer to the original data. The president believes it would be a mistake to change the unit selling price. Instead, he wants to use less costly raw materials, thereby reducing unit costs by 70 cents. How many units would have to be sold next year to earn a target profit of $30,200?
4. Refer to the original data. Whitney Company’s board of directors believes that the company’s problem lies in inadequate promotion. By how much can advertising be increased and still allow the company to earn a target profit of 4.5% on sales of 60,000 units?
5. Refer to the original data. The company has been approached by an overseas distributor who wants to purchase 9,500 units on a special price basis. There would be no sales commission on these units. However, shipping costs would be increased by 50% and variable administrative costs would be reduced by 25%. In addition, a $5,700 special insurance fee would have to be paid by Whitney Company to protect the goods in transit. What unit price would have to be quoted on the 9,500 units by Whitney Company to allow the company to earn a profit of $14,250 on total operations? Regular business would not be affected by this special order.