Income statement analysis Essay

Classification of Relevant Information from Case Provided

Scheduling of year:

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40 Weeks        Product Manufacturing

10 Weeks        Visiting Galleries

2 Weeks          Holiday

Volume and Selling price of predetermined mix:

Vases              6 x $60 =        $360

Paperweights 4 x $40 =         $160

Tumblers         16 x $10 =      $160

Total Selling Price                  $680 per bundle

Production of bundles in 2000: 5 bundles per week

Separation of fixed costs from total costs incurred in production costs.  High Low Method is adopted.

            Bundles                      Costs

4                                                          $2,300

5                                                          $2,800

6                                                          $3,300

Variable cost per bundle:

Costs at 5 Bundles                 $2,800

Costs at 4 Bundles                 $2,300

Variable cost                              $500

Total Cost at 5 Bundles                                 $2,800

Variable cost at 5 Bundles {5 x $500}         $2,500

Fixed Costs                                                      $300

Other Costs:

Shipping Costs of $80 per bundle {variable cost}

Sam’s wage (2 hours x $10)   $20 per bundle (variable cost)

Sam’s remaining wage:

During Production (10 hours x $10 x 40 weeks)      $4,000

During Visiting (20 hours x $10 x 10 weeks)                       $2,000

Total Fixed Sam’s Wage                                           $6,000

I presume that Sam will not work the 2 weeks in which Harry is on holiday.

  The shop will be considered closed in this time frame.

Visiting galleries costs           $6,050 per annum {fixed cost}

We will apply the information gathered and provided in this section in order to answer the questions provided in this coursework.

Question 1

Income Statement for year ended 31st December 2000

{Traditional Format}
$
Sales (5 x $680 x 40)
136,000
Production Costs ($2,800 x 40)
112,000
Gross Profit
24,000
Non-Manufacturing Costs (see note 1)
32,050
Net (Loss)
(8,050)

Source: Drury Colin 1996, p 202

Note 1:

Sam’s Wage (20 hrs x $10 x 50 weeks)                    $10,000

Shipping Costs ($80 x 5 bundles x 40 weeks)          $ 16,000

Visiting Galleries Cost                                              $  6,050

Non-Manufacturing Costs                                        $32,050

Question 2

Income Statement for year ended 31st December 2000

{Contribution Format}
$
Sales (5 x $680 x 40)
136,000
Variable Costs (see note 2)
120,000
Contribution
16,000
Fixed Costs (see note 3)
24,050
Net (Loss)
(8,050)

Source: Lucey Terry 2003, p 348.

Note 2:

Production Costs ($500 x 5 bundles x 40 weeks)                $100,000

Sam’s Wage ($20 x 5 bundles x 40 weeks)                          $    4,000

Shipping Costs ($80 x 5 bundles x 40 weeks)                      $  16,000

Variable Costs                                                                                  $120,000

Note 3:

Production Costs ($300 x 40 weeks)                                    $12,000

Sam’s Wage                                                                          $  6,000

Visiting Galleries Cost                                                          $  6,050

Fixed Costs                                                                           $24,050

Question 3

Question 4

As we can see from the income statements prepared in the previous questions, Harry Huffnpuff Glassblowing is presently incurring a loss.  The income statement under the marginal costing approach, which classifies the costs is an easier way to analyze the situation at hand portrays that the selling price is covering the variable expenditure, leading to a contribution of $80 per bundle.  The problem rests on the coverage of fixed costs (Lucey Terry 2003, p 343-344).  The suggestions should thus focus on this issue.

The background information provided stated that the product manufactured by the company is in high demand leading to a nine-month backlog of orders.  Therefore the organization should either try to modify the production process to speed up productivity or increase the number of production weeks.

With respect to the latter suggestion, Harry could either employ a marketing manager who will handle the visiting of galleries leading to an additional 10 weeks for production.  This could increase the number of bundles to 250 (5 bundles x 50 week).  However, this action would not meet the break-even point of 301 bundles, necessitating the adoption of the other suggestion.

Productivity could be increased in a number of ways.  Examples that come to mind are:

·          Employment of a more efficient machine.

·          Adoption of two machines in the production process; or

·          Diminish the time taken to produce the products.

The combination of these two suggestions can aid Harry Huffnpuff Glassblowing to exceed the break-even point and commence attaining profits.  This is still an early stage to meet the targeted profits of $32,000 ($25,000 x 128%) set by Harry.  The firm should first aim at making a profit by surpassing the break-even point.  Once this objective is met, they ought to formulate another plan on how to reach the desired profits set by the owner.

References:

Drury Colin. Management and Cost Accounting. Fourth Edition. New York: International Thomson Business Press, 1996.

Lucey Terry. Management Accounting. Fifth Edition. New York: Continuum, 2003.

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