Introduction:
Net Operating Income:
An income generated from the revenue of the business after deduction all operating expenses of the business refers to net operating income. In other words, net operating income is the difference between the revenue generated and expenses that are directly incurred for the revenue generation of the business. Net Operating income is the key indicator of the profitability and financial soundness of the company.
Payment of interest, taxes,
To prepare:
The three-column comparative income statement of Windmire manufacturers that shows the operating income without the special order, income received from new business and income from normal business and new business.
Answer to Problem 4BPSB
Solution:
Explanation of Solution
Net Operating Income is calculated by using the formula:
An operating expenses includes cost of goods sold and selling, general and administrative expenses.
Step-1:
Calculation of net operating income without special order:
Revenue:
Given,
Sales unit=300,000 packages
Cost per package=$4
Therefore the revenue from sales for Windmire Manufacturers will be 300,000*$4=$1,200,000
Revenue for Windmire Manufacturers without special order:
Expenses:
Given,
1. Direct Materials: $384,000
2. Direct Labor: $96,000
3.
Fixed Overhead: 25% on overhead i.e. 25% on $288,000= $72,000
Variable Overhead: 75% on overhead i.e.75% on $288,000= $216,000
4. Selling Expenses: $120,000
5. Administrative Expenses: $80,000
Total expenses of Windmire Manufacturers:
Net Operating Income for Windmire Manufacturers without special order:
Step-2:
Calculation of net operating income from new business:
Revenue:
Given,
Sales Units: 50,000 Packages
Cost Per Package: $3.44
Therefore the revenue from sales for Windmire Manufacturers will be 50,000*3.44=$172,000
Revenue for Windmire Manufacturers from new business: $172,000
Expenses:
1. Direct Materials:
Given,
Direct Materials for 300,000 units: $384,000
So Direct Materials for 50,000 units is:
Note: Direct Materials are 100% Variable.
2. Direct Labor
Direct Labor for 300,000 units: $96,000
Direct Labor cost per unit: $96,000/300,000=0.32
Given Direct Labor costs per unit for additional units would be 50% higher than usual labor rate.
Direct Labor costs per unit for 50,000 units will be 0.48 i.e. (0.32+0.32*50%)
So Direct Labor for new business 50,000 units is:
50,000*0.48=$24,000
3. Overhead:
Fixed Overhead: There is no additional fixed costs incurred in new business. Fixed Costs are fixed at 25% from 250,000 to 400,000 units.
Variable Overhead for 300,000 units: 75% on Overhead i.e. 75% on $288,000=$216,000
So Variable Overhead for 50,000 units:
50,000*216,000/300,000=$36,000
4. Selling Expenses:
There is no additional selling expenses for accepting the new business.
5. Administrative Expenses:
Given that new business would increase administrative expenses by $5,000 fixed amount.
Total expenses of Windmire Manufacturers:
Net Operating Income for Windmire Manufacturers from new business:
Step-3:
Calculation of net operating income from normal business and new business:
Revenue:
Given,
Sales Units in normal business: 300,000 Packages
Cost Per Package: $4
Sales Units in new business: 50,000
Cost Per Package: $3.44
Therefore the revenue from sales for Windmire Manufacturers will be
Revenue for Windmire Manufacturers from normal and new business: $1,372,000
Expenses:
1. Direct Materials:
Given,
Direct Material for normal business: $384,000
So Direct Materials for new business 50,000 units is:
50,000*384,000/300,000=$64,000
Therefore Direct Materials for both normal and new business:
2. Direct Labor
Direct Labor for normal business 300,000 units: $96,000
So Direct Labor for new business 50,000 units is: $24,000
Therefore Direct Labor for normal and new business:
3. Overhead:
Overhead for normal business 300,000 units: $288,000
Fixed Overhead:
Fixed Overhead for normal business is 25% of total overhead: $72,000
Fixed Overhead for new business: There is no additional fixed costs incurred in new business. Fixed Costs are fixed at 25% from 250,000 to 400,000 units.
Therefore Fixed Overhead for both normal and new business is:
Variable Overhead:
Variable Overhead for normal business 300,000 units: 75% on Overhead i.e. 75% on $288,000= $216,000
Variable Overhead for new business 50,000 units:
Therefore Variable Overhead for normal and new business:
4. Selling Expenses:
Selling Expenses for normal business 300,000 units: $120,000
Selling Expenses for new business 50,000 units: $0
Therefore the selling expenses for normal and new business:
5. Administrative Expenses:
Administrative Expenses for normal business 300,000 units: $80,000
Administrative Expenses for new business 50,000 units: $4,000
Therefore Administrative Expenses for normal and new business:
Total expenses of Windmire Manufacturers:
Net Operating Income for Windmire Manufacturers from normal and new business:
Hence from the comparative income statement of Windmire manufactures, the net operating income for its normal and new business is $276,000.
Want to see more full solutions like this?
Chapter 25 Solutions
Fundamental Accounting Principles -Hardcover
- A machine costing $77,500 with a 5-year life and $4,700 residual value was purchased January 2. Compute depreciation for each of the 5 years, using the double-declining-balance method. Year1 Y2 Y3 Y4 Y5arrow_forwardSolare Company acquired mineral rights for $536,800,000. The diamond deposit is estimated at 48,800,000 tons. During the current year, 3,390,000 tons were mined and sold. Required: 1.Determine the depletion rate. 2. Determine the amount of depletion expense for the current year. 3.Journalize the adjusting entry to recognize the depletion expense. Refer to the Chart of Accounts for exact wording of account titles. _____________ Debit / Credit _____________ Debit / Crditarrow_forwardExercise 1-24 (Algo) Linking the statement of owner's equity and balance sheet LO P2 Mahomes Company reported the following data at the end of its first year of operations on December 31. Cash Accounts receivable Equipment Land Accounts payable Owner investments Mahomes, Withdrawals Net income $ 15,500 16,500 18,500 62,500 12,500 62,500 31,500 69,500 (a) Prepare its year-end statement of owner's equity. Hint. Mahomes, Capital on January 1 was $0. (b) Prepare its year-end balance sheet, using owner's capital calculated in part a. Complete this question by entering your answers in the tabs below. Required A Required B Prepare its year-end statement of owner's equity. Hint: Mahomes, Capital on January 1 was $0. Cash MAHOMES COMPANY Statement of Owner's Equity For Year Ended December 31arrow_forward
- ht = ences X On December 1, Jasmin Ernst organized Ernst Consulting. On December 3, the owner contributed $84,920 in assets to launch the business. On December 31, the company's records show the following items and amounts. Cash withdrawals by owner Consulting revenue Salaries expense Cash $ 8,450 Accounts receivable 16,950 Office supplies 4,080 Rent expense Land 46,020 Office equipment 18,860 Telephone expense Accounts payable 9,280 Owner investments 84,920 Miscellaneous expenses $ 2,930 16,950 4,420 7,900 860 680 Exercise 1-18 (Algo) Preparing an income statement LO P2 Using the above information prepare a December income statement for the business. ERNST CONSULTING Income Statement Revenues Rent expense Salaries expense Telephone expense Total revenues $ 4,420 7,900 860 $ SA Assets Cash 8,450 Accounts receivable 16,950 Office supplies 4,080 Land 46,020 Office equipment 18,860 navable 9,280 13,180 5 11 of 14 Next >arrow_forwardEquipment was acquired at the beginning of the year at a cost of $77,220. The equipment was depreciated using the straight-line method based upon an estimated useful life of 6 years and an estimated residual value of $7,560. P1 What was the depreciation expense for the first year? _______ P2 Assuming the equipment was sold at the end of the second year for $58,320, determine the gain or loss on sale of the equipment. $_______________ P3 Journalize the entry to record the sale. Refer to the Chart of Accounts for exact wording of account titles. 1. ____ Debit / Credit 2.____ Debit / Credit 3.____ Debit / Credit 4.____ Debit / Creditarrow_forwardUse the following information for the Exercises below. (Algo) [The following information applies to the questions displayed below.] On December 1, Jasmin Ernst organized Ernst Consulting. On December 3, the owner contributed $84,920 in assets to launch the business. On December 31, the company's records show the following items and amounts. Cash Accounts receivable Office supplies Land Office equipment Accounts payable Owner investments $ 8,450 Cash withdrawals by owner 16,950 4,080 Rent expense Consulting revenue Salaries expense 18,860 Telephone expense Miscellaneous expenses 46,020 9,280 84,920 $ 2,930 16,950 4,420 7,900 860 680 Check my work Exercise 1-21 (Algo) Preparing a statement of cash flows LO P2 Also assume the following: a. The owner's initial investment consists of $38,900 cash and $46,020 in land. b. The company's $18,860 equipment purchase is paid in cash. c. Cash paid to employees is $2,700. The accounts payable balance of $9,280 consists of the $4,080 office supplies…arrow_forward
- ht = ences X On December 1, Jasmin Ernst organized Ernst Consulting. On December 3, the owner contributed $84,920 in assets to launch the business. On December 31, the company's records show the following items and amounts. Cash withdrawals by owner Consulting revenue Salaries expense Cash $ 8,450 Accounts receivable 16,950 Office supplies 4,080 Rent expense Land 46,020 Office equipment 18,860 Telephone expense Accounts payable 9,280 Owner investments 84,920 Miscellaneous expenses $ 2,930 16,950 4,420 7,900 860 680 Exercise 1-18 (Algo) Preparing an income statement LO P2 Using the above information prepare a December income statement for the business. ERNST CONSULTING Income Statement Revenues Rent expense Salaries expense Telephone expense Total revenues $ 4,420 7,900 860 $ SA Assets Cash 8,450 Accounts receivable 16,950 Office supplies 4,080 Land 46,020 Office equipment 18,860 navable 9,280 13,180 5 11 of 14 Next >arrow_forwardAssets Current Assets Cash Credit card receivables Accounts receivable Marketable securities Food Inventories Prepaid expenses Total Current Assets Golden Bay Balance Sheet as at December 31 Year 2018 Year 2019 $ 18,500 9,807 $ 29,400 11,208 5,983 6,882 15,400 2,000 12,880 14,700 10 800 14 900 73370 79 090 Property Plant & Equipment Land Building Equipment Furnishings $ 60,500 828,400 114,900 75,730 (330,100) 16 600 766 030 839 400 $ 60,500 884,400 157,900 81,110 (422,000) 18 300 7 80 210 859 300 Net: Accumulated depreciation China, glass, silver, & linen Total Assets Liabilities & Stockholders' Equity Current Liabilities Accounts payable Accrued expenses payable Taxes payable Current mortgage payable Total Current assets $ 19,200 4,200 12,400 26 900 62 700 $16,500 5,000 20,900 26 000 68 400 Long-term liabilities Mortgage payable Total Liabilities $ $512 800 $486 400 575 500 $555 200 Stockholders' Equity Common stock ($5 par. 40,000 shares issued & OS) $200,000 Retained earnings…arrow_forwardMat lives in Barbados and is desirous of starting his own business from inheritances that his parents left him. He approached you for advice on the best type of business to register. Mr. Mat said he would love to gain benefits from any tax relief that is available that the government has to offer. Give advice to Mr. Mat whether it would be more beneficial to start a Company or an Individual Trading Business. outline for Mr. Mat why setting up either a company, or a trading as business is more advantageous over the other. cover matters like: Tax rates, Available tax reliefs and or tax credits Ease of operations of a company, as well as ease of operations of an individual trading business.arrow_forward
AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,
Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSON
Intermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill Education
Financial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education