Chapter 25, Problem 4AP

To determine

Prepare a three-column comparative income statement for (1) Normal business without special order, (2) New business, and (3) combined business.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare a three-column comparative income statement for (1) Normal business without special order, (2) New business, and (3) combined business as follows:

Company J
Comparative Income Statements
Particulars	(1) Normal business (400,000 packages) (A)	(2) New Business (50,000 packages) (B)	(3) Combined $\text{C = }\left(\text{A + B}\right)$
Sales	$2,400,000	$260,000 (W.N.6)	$2,660,000
Less: Costs and expenses
Direct materials	576,000	72,000 (W.N.7)	648,000
Direct labor	144,000	27,000 (W.N.8)	171,000
Overhead	320,000	30,000 (W.N.9)	350,000
Selling expenses	150,000	-	150,000
Administrative expenses	100,000	5,000	105,000
Operating income	$1,110,000	$126,000	$1,236,000

Table (1)

Working note 1:

Calculate the direct material cost per package for new business.

$\begin{array}{c}\begin{array}{l}\text{Direct material cost }\\ \text{per package}\end{array}\}\text{ = }\frac{\text{Cost of direct material}}{\text{Number of packages producted}}\\ =\frac{\$576,000}{400,000}\\ =\$1.44\text{ per package}\end{array}$

Working note 2:

Calculate the variable direct labor cost per package for new business.

$\begin{array}{c}\begin{array}{l}\text{Variable direct labor cost }\\ \text{per package}\end{array}\}\text{ = }\frac{\text{Direct labor}}{\text{Number of packages producted}}\\ =\frac{\$144,000}{400,000}\\ =\$0.36\text{ per package}\end{array}$

Working note 3:

Calculate total direct labor cost per package for new business.

$\begin{array}{c}\begin{array}{l}\text{Total direct labor cost }\\ \text{per package}\end{array}\}\text{ = }\left[\begin{array}{l}\text{Variable direct labor cost per package +}\\ \text{Incrased cost of direct labor per package (50\%)}\end{array}\right]\\ =0.36\text{ (W}\text{.N}\text{. 2)}+\left(0.36\times \frac{50}{100}\right)\\ =0.36+0.18\\ =\$0.54\text{ per package}\end{array}$

Working note 4:

Calculate the fixed overhead at any production level from 350,000 to 500,000 units for new business.

$\begin{array}{c}\text{Fixed overhead = Overhead (given) }\times \text{ Fixed percentage}\\ \text{=\$320,000}\times \frac{\text{25}}{100}\\ =\$80,000\end{array}$

Working note 5:

Calculate the variable overhead per package for new business.

$\begin{array}{c}\begin{array}{l}\text{Variable overhead }\\ \text{per package}\end{array}\}\text{ = }\frac{\text{Overhead (given) }-\text{ Fixed overheads}}{\text{Number of package produced}}\\ =\frac{\$320,000-\$80,000(\text{W}\text{.N}\text{. 4)}}{400,000}\\ =\frac{\$240,000}{400,000}\\ =0.6\text{ per package}\end{array}$

Working note 6:

Calculate the value of sales for new business.

$\begin{array}{c}\text{Sales = Number of package produced }\times \text{ Sales per package}\\ \text{=50,000 packages }\times \text{\$5}\text{.20 per package}\\ \text{=\$260,000}\end{array}$

Working note 7:

Calculate the direct material cost for new business.

$\begin{array}{c}\text{Direct material = Number of package produced }\times \text{ Direct material per package}\\ \text{=50,000 packages }\times \text{\$1}\text{.44 per package (W}\text{.N}\text{. 1)}\\ \text{=\$72,000}\end{array}$

Working note 8:

Calculate the direct labor cost for new business.

$\begin{array}{c}\text{Direct labor = Number of package produced }\times \text{ Direct material per package}\\ \text{=50,000 packages }\times \text{\$0}\text{.54 per package (W}\text{.N}\text{. 3)}\\ \text{=\$27,000}\end{array}$

Working note 9:

Calculate the variable overhead for new business.

$\begin{array}{c}\text{Variable overhead = Number of package produced }\times \text{ Variable overhead per package}\\ \text{=50,000 packages }\times \text{\$0}\text{.6 per package (W}\text{.N}\text{. 5)}\\ \text{=\$30,000}\end{array}$