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5-2 RAINRULER STAINS [LO 1, 2] RainRuler Stains produces a variety of exterior wood stains that have excellent coverage and longevity. In 2017, Gross profit

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5-2 RAINRULER STAINS [LO 1, 2] RainRuler Stains produces a variety of exterior wood stains that have excellent coverage and longevity. In 2017, Gross profit per dollar of sales the company produced and sold 310,000 gallons of stain. There ($1,350,000 + $4,650,000) 0.2903 was no beginning inventory. Income for the year was as follows: Incremental profit $243,852 RainRuler Stains Since the incremental profit was more than two times as large as Income Statement current net income, most of the managers present at the meeting For the Year Ended December 31, 2017 expressed their hearty congratulations. Jennifer Jones, a sum- Sales mer intern and assistant to the company controller, Ed Flem- Less cost of goods sold $4,650,000 3,300,000 ming, thought Reggie's estimate was more than a little rough. Gross profit After the meeting, she approached her boss and expressed her 1,350,000 misgivings. "Ed, according to our previous discussions, fixed Less selling and administrative expenses: production costs related to rent, depreciation, and other items Selling expense $870,000 are about $1,362,500 per year. Reggie's analysis assumes that Administrative expense 360,000 1,230,000 there aren't any fixed manufacturing overhead items. And I Net income $ 120,000 know our shipping costs, which are included in selling expense, are around $0.70 per gallon. Reggie's analysis assumes all sell- In the past, the company has marketed its product only to indepen ing expense is fixed. It's probably the case that almost all of our dent hardware stores in Oregon, Washington, and Idaho. Recently, administrative expense is fixed, but that's clearly not accurate however, Reggie Sherman, VP of marketing, has negotiated deals for selling expense. How about if I recast our income statement with several large construction companies. He estimates that these in a contribution margin format-you know, using variable deals will increase annual sales by 70,000 gallons but at a reduced costing-and use that as a basis to estimate the impact of the price of $12 per gallon. (The price in 2017 to hardware stores was new channel sales?" Ed quickly agreed to Jennifer's proposal. $15 per gallon, and this will not be affected by the new deals.) At a recent meeting of the company's senior management team, Reggie presented a rough estimate of the financial impact REQUIRED of selling through the new channel: 70,000 Assume the role of Jennifer and prepare an income statement for Additional sales (gallons) $ 12.00 2017 using variable costing. Then use information on that state- Selling price per gallon ment as a basis for estimating the annual impact on profit of sales Incremental revenue $840,000 to construction companies

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