Solaris Corporation prepared the following estimates for the four quarters of the current year: First Quarter Second Quarter Third Quarter Fourth Quarter Sales $ 1,375,000 $ 1,650,000 $ 1,925,000 $ 2,200,000 Cost of goods sold 442,000 522,000 592,000 642,000 Administrative costs 460,000 260,000 265,000 275,000 Advertising costs 0 160,000 0 0 Executive bonuses 0 0 0 88,000 Provision for bad debts 0 0 0 52,000 Annual maintenance costs 70,000 0 0 0 Additional Information First-quarter administrative costs include the $200,000 annual insurance premium. Advertising costs paid in the second quarter relate to television advertisements that will be broadcast throughout the entire year. No special items affect income during the year. The company estimates an effective income tax rate for the year of 25 percent. Assuming that actual results do not vary from the estimates provided, determine the amount of net income to be reported each quarter of the current year. Assume that actual results do not vary from the estimates provided except for that in the third quarter, the estimated annual effective income tax rate is revised downward to 22 percent. Determine the amount of net income to be reported each quarter of the current year.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Solaris Corporation prepared the following estimates for the four quarters of the current year:
| First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
|||||||||
| Sales | $ | 1,375,000 | $ | 1,650,000 | $ | 1,925,000 | $ | 2,200,000 | ||||
| Cost of goods sold | 442,000 | 522,000 | 592,000 | 642,000 | ||||||||
| Administrative costs | 460,000 | 260,000 | 265,000 | 275,000 | ||||||||
| Advertising costs | 0 | 160,000 | 0 | 0 | ||||||||
| Executive bonuses | 0 | 0 | 0 | 88,000 | ||||||||
| Provision for |
0 | 0 | 0 | 52,000 | ||||||||
| Annual maintenance costs | 70,000 | 0 | 0 | 0 | ||||||||
Additional Information
- First-quarter administrative costs include the $200,000 annual insurance premium.
- Advertising costs paid in the second quarter relate to television advertisements that will be broadcast throughout the entire year.
- No special items affect income during the year.
- The company estimates an effective income tax rate for the year of 25 percent.
-
Assuming that actual results do not vary from the estimates provided, determine the amount of net income to be reported each quarter of the current year.
-
Assume that actual results do not vary from the estimates provided except for that in the third quarter, the estimated annual effective income tax rate is revised downward to 22 percent. Determine the amount of net income to be reported each quarter of the current year.
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