Chapter 1, Problem 25PSA

a.

To determine

Prepare an income statement and the cost of waste with unused books.

Answer to Problem 25PSA

Calculation of income statement of the Company CM is as follows:

Table (1)

Calculation of cost of unused books is as follows:

$\begin{array}{c}\text{Cost of unused books}=\left(\left(\begin{array}{l}\text{Expected enrollment}\\ -\text{Number of students enrolled}\end{array}\right)\times \text{Text book cost}\right)\\ =\left(\left(110-95\right)\times \$80\right)\\ =(15)\times \$80\\ =\$1,200\end{array}$

Hence, the cost of waste associated with the unused books is $1,200.

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Working notes:

Calculate the revenue:

$\begin{array}{c}\text{Revenue}=\text{Fees of per student}\times \text{Number of students}\\ =\$1,500\times 95\\ =\$142,500\end{array}$

Hence, the revenue is $142,500.

…… (1)

Calculate the total cost of textbooks:

$\begin{array}{c}\text{Cost of textbooks}=\text{Cost of each textbook}\times \text{Number of textbooks ordered}\\ =\$80\times 110\\ =\$8,800\end{array}$

Hence, the cost of textbooks is $8,800.

…… (2)

b.

To determine

Prepare an income statement and determine the amount of profit that is lost from the incapability of serving the 5 additional students.

Answer to Problem 25PSA

Calculation of income statement of the Company CM in case of 110 students is as follows:

Table (2)

Calculation of income statement of the Company CM in case of 115 student is as follows:

Table (3)

Calculation of lost profit is as follows:

$\begin{array}{c}\text{Lost profit}=\text{Net income from 115 students}-\text{Net income from 110 students}\\ =\$87,300-\$80,200\\ =\$7,100\end{array}$

Hence, the lost profit from rejecting additional students is $7,100.

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Working notes:

Note:

115 students has attempted to register but only 110 students could be accepted.

Calculate the revenue for 220 students:

$\begin{array}{c}\text{Revenue}=\text{Fees of per student}\times \text{Number of students}\\ =\$1,500\times 110\\ =\$165,000\end{array}$

Hence, the revenue is $165,000.

…… (3)

Calculate the revenue for 240 students:

$\begin{array}{c}\text{Revenue}=\text{Fees of per student}\times \text{Number of students}\\ =\$1,500\times 115\\ =\$172,500\end{array}$

Hence, the revenue is $172,500.

…… (4)

Calculate the total cost of textbooks:

$\begin{array}{c}\text{Cost of textbooks}=\text{Cost of each textbook}\times \text{Number of textbooks ordered}\\ =\$80\times 115\\ =\$9,200\end{array}$

Hence, the cost of textbooks is $9,200.

…… (5)

c.

To determine

Prepare an income statement under the process of just in time system for 95 students, compare the income statement with requirement a., and comment how this system would affect the profitability.

Answer to Problem 25PSA

Calculation of income statement of the Company CM under just in time system for 95 students is as follows:

Table (4)

Comparison and comment on the income statement is as follows:

The expenses on the cost of textbooks will come down by using just in time inventory system than traditional inventory system used in requirement a. The revenue remains the same, but just in time, inventory system will bring greater net income than traditional inventory system.

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Just in time:

Just in time is a management strategy used by the organizations to decrease waste and increase the efficiency by receiving goods that are required for production. That decreases the inventory cost.

Working notes:

Calculate the total cost of textbooks:

$\begin{array}{c}\text{Cost of textbooks}=\text{Cost of each textbook}\times \text{Number of textbooks ordered}\\ =\$90\times 95\\ =\$8,550\end{array}$

Hence, the cost of textbooks is $8,550.

…… (6)

d.

To determine

Prepare an income statement under the process of just in time system for 115 students, compare the income statement with requirement b, and comment how this system would affect the profitability.

Answer to Problem 25PSA

Calculation of income statement of the Company CI under just in time system for 115 students is as follows:

Table (5)

Comparison and comment on the income statement is as follows:

The extra revenue from 5 students would increase the cost of books under just in time inventory system. Therefore, it results in greater net income than the traditional inventory system.

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Just in time:

Just in time is a management strategy used by the organizations to decrease waste and increase the efficiency by receiving goods that are required for production. That decreases the inventory cost.

Working notes:

Calculate the revenue for 115 students:

$\begin{array}{c}\text{Revenue}=\text{Fees of per student}\times \text{Number of students}\\ =\$1,500\times 115\\ =\$172,500\end{array}$

Hence, the revenue is $172,500.

…… (7)

Calculate the total cost of textbooks:

$\begin{array}{c}\text{Cost of textbooks}=\text{Cost of each textbook}\times \text{Number of textbooks ordered}\\ =\$90\times 115\\ =\$10,350\end{array}$

Hence, the cost of textbooks is $10,350.

…… (8)

e.

To determine

Discuss the probable effects of the just in time inventory system on the level of customer satisfaction.

Explanation of Solution

Just in time:

Just in time is a management strategy used by the organizations to decrease waste and increase the efficiency by receiving goods that are required for production. That decreases the inventory cost.

The probable effect of just in time inventory system on the level of customer satisfaction is as follows:

Students who are deprived of from the enrollment might create a negative impression on the Company CM. This negative image can be spread easily among the public. The just in time system could help the company to improve the customer satisfaction level and increase their net income.