Accounting Questions

Prepare a CVP income statement, compute breakeven point, contribution margin ratio, margin of safety ratio, and sales for target net income.

(LO 2, 3, 4)

P19-2B All Frute Company bottles and distributes Frute Ade, a fruit drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers, who charge customers 70 cents per bottle. For the year 2017, management estimates the following revenues and costs.

Sales	$2,500,000	Selling expenses—variable	$ 80,000
Direct materials	360,000	Selling expenses—fixed	250,000
Direct labor 450,000 Manufacturing overhead— variable 270,000 Manufacturing overhead— fixed 380,000		Administrative expenses— variable	40,000
		Administrative expenses— fixed	150,000

Instructions

(b) (1) 3,000,000 units

(c) CM ratio 52%

(a) Prepare a CVP income statement for 2017 based on management’s estimates. (Show column for total amounts only.)

(b) Compute the break-even point in (1) units and (2) dollars.

(c) Compute the contribution margin ratio and the margin of safety ratio.

(d) Determine the sales dollars required to earn net income of $624,000.

Compute gain or loss, and determine if equipment should be replaced.

(LO 5)

P21-4B Last year (2016), Simmons Company installed new factory equipment. The owner of the company, Gene Simmons, recently returned from an industry equipment exhibition where he watched computerized equipment demonstrated. He was impressed with the equipment’s speed and cost efficiency. Upon returning from the exhibition, he asked his purchasing agent to collect price and operating cost data on the new equipment. In addition, he asked the company’s accountant to provide him with cost data on the company’s equipment. This information is presented below.

	Old Equipment	New Equipment
Purchase price	$210,000	$250,000
Estimated salvage value	0	0
Estimated useful life	5 years	4 years
Depreciation method	Straight-line	Straight-line
Annual operating costs
other than depreciation:
Variable	$50,000	$12,000
Fixed	30,000	5,000

Annual revenues are $360,000, and selling and administrative expenses are $45,000, regardless of which equipment is used. If the old equipment is replaced now, at the beginning of 2017, Simmons Company will be able to sell it for $58,000.

Instructions

(a) Determine any gain or loss if the old equipment is replaced.

(b) Prepare a 4-year summarized income statement for each of the following assumptions:

(b) (2) NI $832,000

(1) The old equipment is retained.

(c) NI increase $60,000

(2) The old equipment is replaced.

(c) Using incremental analysis, determine if the old equipment should be replaced.

Prepare incremental analysis concerning elimination of divisions.

(LO 6)

(d) Write a memo to Gene Simmons explaining why any gain or loss should be ignored in the decision to replace the old equipment.

9 years ago

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