Problem 5-1 Redlands Inc. sells one product for $5. The variable cost per item is $3, and the fixed costs for the firm are $40. Required: a. Compute the breakeven point in units. b. Compute the number of units and sales revenue needed to achieve a $20 profit. (Ignore income taxes.) c. Assume that the income tax rate for Redlands is 40%. Compute the number of units and sales revenue needed to achieve an $18 net profit. d. Compute the number of units and sales revenue needed to achieve an 8% profit margin. (Ignore income taxes.) e. Compute the number of units and sales revenue needed to achieve a 12% net profit margin. (Assume a 40% income tax rate.) f. Assume that Redlands currently sells 40 units. Redlands estimates that if it increased sales price to $6 per unit demand would decrease by 10%. Determine if Redlands should increase its selling price. (Ignore income taxes.) g. Assume that Redlands currently sells 30 units and has a 40% income tax rate. The firm estimates that a $25 increase in fixed cost from automating the plant would lower variable costs to $2 per unit. Determine if Redlands should change its cost structure. Problem 5-1 a. b. c. d. e. f. Current
Assignment 5.1: Session 5 Comprehensive Problem
Problem 5-1
Redlands Inc. sells one product for $5. The variable cost per item is $3, and the fixed costs for the firm are $40.
Required:
a. Compute the breakeven point in units.
b. Compute the number of units and sales revenue needed to achieve a $20 profit. (Ignore income taxes.)
c. Assume that the income tax rate for Redlands is 40%. Compute the number of units and sales revenue needed to achieve an $18 net profit.
d. Compute the number of units and sales revenue needed to achieve an 8% profit margin. (Ignore income taxes.)
e. Compute the number of units and sales revenue needed to achieve a 12% net profit margin. (Assume a 40% income tax rate.)
f. Assume that Redlands currently sells 40 units. Redlands estimates that if it increased sales price to $6 per unit demand would decrease by 10%. Determine if Redlands should increase its selling price. (Ignore income taxes.)
g. Assume that Redlands currently sells 30 units and has a 40% income tax rate. The firm estimates that a $25 increase in fixed cost from automating the plant would lower variable costs to $2 per unit. Determine if Redlands should change its cost structure.
Problem 5-1
a.
b.
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d.
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f.
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Current |
Alternative |
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Sales revenue |
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Variable cost |
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Contribution margin |
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Fixed cost |
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Net income |
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g.
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Current |
Alternative |
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Sales revenue |
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Variable cost |
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Contribution margin |
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Fixed cost |
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Pretax income |
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Income tax expense |
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Net income |
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Problem 5-3
Whitelands Inc. had the following operating transactions during January 2020, its first month of operations.
Date Transaction
1/1 Purchased 2 units of inventory costing $4 each on credit
1/3 Purchased 3 units of inventory costing $5 each on credit
1/10 Purchased 4 units of inventory costing $6 each on credit
1/21 Paid for the January 1 purchase
1/23 Paid for the January 3 purchase
1/30 Sold 7 units of inventory at $10 each on credit
1/30 Matched the inventory cost to January 30 on a FIFO basis
1/31 Estimated that 10% of credit sales will not be realized in cash
Required:
a. Record the above transactions in Whitelands journal (attached in the template below).
b. Present Whitelands’ income statement through gross profit for January 2020 (attached in the template below).
c. Report
a. Record the above transactions in Whitelands journal below.
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Debit |
Credit |
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1/1/20 |
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1/3/20 |
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1/10/20 |
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1/21/20 |
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1/23/20 |
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1/30/20 |
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1/31/20 |
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1/31/20 |
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b. Present Whitelands’ income statement through gross profit for January 2020.
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Sales revenue |
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Cost of goods sold |
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Gross profit |
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c. Report accounts receivable, inventory, and accounts payable on Whitelands’ January 31, 2020 balance sheet.
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Current Assets: |
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Cash |
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Accounts receivable, gross |
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Less: allowance for uncollected accounts |
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Accounts receivable, net |
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Inventory |
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Current Liabilities: |
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Accounts payable |
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