2-30Cost of goods purchased, cost of goods sold, and income statement.

The following data are for Cloths Outlet Stores. The account balances (in thousands) are for 2019.

Marketing and advertising costs

$ 88,000

Merchandise inventory, January 1, 2014

60,000

Shipping of merchandise to customers

10,000

Building depreciation

9,400

Purchases

720,000

General and administrative costs

94,000

Merchandise inventory, December 31, 2014

133,000

Merchandise freight-in

30,000

Purchase returns and allowances

8,000

Purchase discounts

28,000

Revenues

350,000

Required:

1.Compute (a) the cost of goods purchased and (b) the cost of goods sold.

2.Prepare the income statement for 2014.

SOLUTION

1a. Montgomery Retail Outlet Stores

Schedule of Cost of Goods Purchased

For the Year Ended December 31, 2014

(in thousands)

1b.Montgomery Retail Outlet Stores

Schedule of Cost of Goods Sold

For the Year Ended December 31, 2014

(in thousands)

2. Montgomery Retail Outlet Stores

Income Statement

Year Ended December 31, 2014

(in thousands)

Formulas for the below

SP: Selling price

VCU: Variable cost per unit

CMU: Contribution margin per unit

FC: Fixed costs

TOI: Target operating income

Contribution Margin = Total Revenue - Total Variable Costs

Contribution Margin per unit = Selling price - Number of units sold

Operating Income = Contribution margin - Fixed costs

Contribution Margin Ratio (or Percentage) = Contribution Margin / Revenue

Breakeven units Selling price = Breakeven revenues

[Units sold (Selling price - Variable costs)] - Fixed costs = Operating income

Contribution margin ratio =

Fixed costs Contribution margin per unit = Breakeven units

Fixed costs Contribution margin ratio = Breakeven revenues

1. Breakeven units Selling price = Breakeven revenues

1. [Units sold (Selling price - Variable costs)] - Fixed costs = Operating income

1. Contribution margin ratio =

4.Fixed costs Contribution margin per unit = Breakeven units

5.Fixed costs Contribution margin ratio = Breakeven revenues

3-20(20 min.) CVP exercises.

The Doral Company manufactures and sells pens. Currently, 5,000,000 units are sold

per year at $0.50 per unit. Fixed costs are $900,000 per year. Variable costs are $0.30 per unit.

Consider each case separately:

Required:

1. a. What is the current annual operating income?

b. What is the present breakeven point in revenues?

Compute the new operating income for each of the following changes:

2. A $0.04 per unit increase in variable costs

3. A 10% increase in fixed costs and a 10% increase in units sold

4. A 20% decrease in fixed costs, a 20% decrease in selling price, a 10% decrease in variable cost per unit, and a 40% increase in units sold

Compute the new breakeven point in units for each of the following changes:

5. A 10% increase in fixed costs

6. A 10% increase in selling price and a $20,000 increase in fixed costs

SOLUTION

1a.[Units sold (Selling price - Variable costs)] - Fixed costs = Operating income

=------------------

1b.Fixed costs Contribution margin per unit = Breakeven units

=---------------- units

Breakeven units Selling price = Breakeven revenues

----------------------------------

or,

Contribution margin ratio =

= --------------------

Fixed costs Contribution margin ratio = Breakeven revenues

---------------------

2.

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3.

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4.

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5.

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6.

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