Chapter 1, Problem 54IC

Miller Cereals is a small milling company that makes a single brand of cereal. Recently, a business school intern recommended that the company introduce a second cereal in order to “diversify the product portfolio.” Currently, the company shows an operating profit that is 20 percent of sales. With the single product, other costs were twice the cost of rent.

The intern estimated that the incremental profit of the new cereal would only be 2.5 percent of the incremental revenue, but it would still add to total profit. On his last day, the intern told Miller’s marketing manager that his analysis was on the company laptop in a spreadsheet with a file name, NewProduct.xlsx. The intern then left for a 12-month walkabout in the outback of Australia and cannot be reached.

When the marketing manager opened the file, it was corrupted and could not be opened. She then found an early (incomplete) copy on the company’s backup server. The incomplete spreadsheet is shown following. The marketing manager then called a cost management accountant in the controller’s office and asked for help in reconstructing the analysis.

Required

As the management accountant, fill in the blank cells.

To determine

Fill in the blank cells of the projected income statement.

Explanation of Solution

Projected income statement: The projected income statement represents the future financial position of the entity. The projected income statement is prepared with an objective of showing the financial results for a future period of time.

Fill in the blank cells of the projected income statement:

Company M
Projected Income Statement
For One Year
	Status Quo:	% Increase	Alternative
	Single Product	Decrease	Two Products	Difference
Sales revenue	$         150,000 (a)	40%	$        210,000 (b)	$     60,000
Costs
Material	$           40,000	50% (j)	$          60,000	$        20,000 (k)
Labor	$           50,000 (l)	20%	$       60,000	$        10,000 (m)
Rent	$           6,000 (q)	50%	$          9,000 (s)	$          3,000 (u)
Depreciation	$              8,000	0% (n)	$             8,000	$            -
Utilities	$             4,000 (o)	25% (p)	$            5,000	$          1,000
Other	$           12,000 (r)		$         36,500 (t)	$       24,500 (v)
Total costs	$           120,000 (g)		$          178,500 (i)	$    58,500 (h)
Operating profit	$           30,000 (c)	5% (f)	$          31,500 (e)	$     1,500 (d)

Table (1)

Working note 1:

Compute the value of (a):

It is given that the profit has increased by 40%. (a) represents the amount of sales revenue.

$\begin{array}{c}\text{(a}\text{)}\text{=}\frac{\$60,000}{0.40}\\ =\$150,000\end{array}$

Working note 2:

Compute the value of (b):

$\begin{array}{c}\left(\text{b}\right)\text{=}\text{\$150,000}+\$60,000\\ \text{=}\text{\$210,000}\end{array}$

Working note 3:

Compute the value of (c):

$\begin{array}{c}\left(\text{c}\right)\text{=}\text{\$150,000}\times \text{ 0}\text{.20}\\ \text{=}\text{\$30,000}\end{array}$

Working note 4:

Compute the value of (d):

$\begin{array}{c}\left(\text{d}\right)\text{=}\text{\$60,000}\text{× 0}\text{.25}\\ \text{=}\text{\$1,500}\end{array}$

Working note 5:

Compute the value of (e):

$\begin{array}{c}\left(\text{e}\right)\text{=}\text{\$30,000}+\text{\$1,500}\\ \text{=}\text{\$31,500}\end{array}$

Working note 5:

Compute the value of (f):

$\begin{array}{c}\left(\text{f}\right)\text{=}\frac{\$1,500}{\$30,000}\\ \text{=}50\%\end{array}$

Working note 6:

Compute the value of (g):

$\begin{array}{c}\left(\text{g}\right)\text{=}\$150,000-\$30,000\\ \text{=}\text{\$120,000}\end{array}$

Working note 6:

Compute the value of (h):

$\begin{array}{c}\left(\text{h}\right)\text{=}\$60,000-\$1,500\\ \text{=}\text{\$58,500}\end{array}$

Working note 7:

Compute the value of (i):

$\begin{array}{c}\left(\text{i}\right)\text{=}\text{\$120,000}+\text{\$58,500}\\ \text{=}\text{\$178,500}\end{array}$

Working note 8:

Compute the value of (j):

$\begin{array}{c}\left(\text{j}\right)\text{=}\left(\frac{\$60,00}{\text{40,000}}\right)-1\\ \text{=}\text{\$50\%}\end{array}$

Working note 9:

Compute the value of (k):

$\begin{array}{c}\left(\text{k}\right)\text{=}\text{\$60,000}+\text{\$40,000}\\ \text{=}\$20\text{,000}\end{array}$

Working note 10:

Compute the value of (l):

$\begin{array}{c}\left(\text{l}\right)\text{=}\frac{\$60,000}{1.20}\\ \text{=}\text{\$50,000}\end{array}$

Working note 11:

Compute the value of (m):

$\begin{array}{c}\left(\text{m}\right)\text{=}\text{\$60,000}-\text{\$50,000}\\ \text{=}\text{\$10,000}\end{array}$

Working note 12:

Compute the value of (n):

The value of n is 0 as there was no change.

$\left(\text{n}\right)\text{=}0\%$

Working note 13:

Compute the value of (o):

$\begin{array}{c}\left(\text{o}\right)\text{=}\text{\$5,000}\text{- \$1,000}\\ =\$4,000\end{array}$

Working note 14:

Compute the value of (p):

$\begin{array}{c}\left(\text{p}\right)\text{=}\frac{\$1,000}{\$4,000}\\ \text{=}25\%\end{array}$

Working note 15:

Compute the value of (q):

Value of rent:

$\begin{array}{c}\mathrm{Re}nt+Other\cos ts=\$120,000-\$40,000-\$50,000-\$8,000-\$4,000\\ =\$18,000\end{array}$

The value of rent is half of the other costs. Thus, the value of rent will be $6,000, and that of other costs will be $12,000.

Thus,

$\left(q\right)=\$6,000$

Working note 16:

Compute the value of (r):

$\begin{array}{c}\left(r\right)=\left(\$6,000\times 2\right)\\ =\$12,000\end{array}$

Working note 17:

Compute the value of (s):

$\begin{array}{c}\left(s\right)=\left(\$6,000\times 1.50\right)\\ =\$9,000\end{array}$

Working note 18:

Compute the value of (t):

$\begin{array}{c}\left(t\right)=\$178,500-\$60,000-\$60,000-\$9,000-\$8,000-\$5,000\\ =\$36,500\end{array}$

Working note 19:

Compute the value of (u):

$\begin{array}{c}\left(\text{u}\right)\text{=}\text{\$9,000}\text{- \$6,000}\\ =\$3,000\end{array}$

Working note 20:

Compute the value of (v):

$\begin{array}{c}\left(\text{v}\right)\text{=}\text{\$36,500}\text{- \$12,000}\\ =\$24,500\end{array}$