3.

EASTDALE INDUSTRIES INC.

STATEMENT OF INCOME

FOR THE YEAR ENDED MARCH 31, 2020

2020 2019

Sales revenue $1,095,000 $750,000

Cost of goods sold 635,100 435,000

Gross profit 459,900 315,000

Expenses

Depreciation 29,520 24,000

Office supplies 2,200 1,600

Salaries and benefits 112,850 102,500

Rent 18,000 18,000

Utilities 27,192 20,200

189,762 166,300

Operating income 270,138 148,700

Income tax expense 59,430 32,714

Net income $ 210,708 $ 115,986

Additional information:

Unit sales for 2020 and 2019 were 8,760 and 6,000 units, respectively.

Required:

5 a) For each cost in the above income statement, identify whether the cost is fixed, variable and mixed with respect to sales volume, and explain how this was determined.

1 b) Determine a reasonable cost driver for income tax expense. That is, what is the nature of the activity that would cause income tax expense to vary?

2 c) Select one mixed cost and prepare a scattergraph. From the scattergraph, use the visual fit method to determine the total fixed cost and variable cost per unit.

6 d) For the remaining mixed costs, determine the fixed and variable component of each cost using the high-low method. Why is the preparation of a scattergraph of no benefit given the information you have available?

2 e) Based on your knowledge of depreciation methods from financial accounting, give a reasonable explanation of the cost structure of depreciation expense that you have identified earlier.

7 f) Using a contribution format, prepare a budgeted income statement for 2021 if 9,600 units are expected to be sold. Stop at the calculation of operating income, so no income tax expense need be calculated.