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3. Case Analysis Gateway Construction Company is a family-operated business that was founded in 1950 by Albert Gat. In the beginning, the company consisted of Albert and three employees laying gas, water, and sewage pipelines as subcontractors, Currently. the company employs 25 to 30 people. Jack Gat is directing it. The main line of business continues to be laying pipeline. Most of Gateway's work comes from contracts which city and state agencies, All company's work is located in Gateways The company's sales volume averages P3 million, and profits vary between 0 and 10 percent of sales, Sales and profits have been somewhat below average for the past three years due to a recession and intense competition. Because of this competition. Jack Gat is constantly reviewing the prices that other companies bid for jobs; when a bid is lost, he makes every attempt to analyze the reasons for the differences between his bid and that of his competitors. He uses information to increase the competitiveness of future bids Jack has become convinced that Gateway's current accounting system is deficient. Currently. all expenses are simply deducted from revenues to arrive at net income. No effort is made to distinguish among the cost of laying pipe, obtaining contracts, and administrating the company. Yet, all bids are based on the cost of laying pipe. With these thoughts in mind, Jack began a careful review of the income statement for the previous year (see below). First, he noted that jobs were priced on the basis of equipment hours, with an average price of P 165 per equipment hour. However, when it came to classifying and assigning costs, he decided that he needed some help. One thing that really puzzled him was how to classify his annual own salary of P114,000. About half of his time was spent in bidding and securing contracts, and the other half was spent in general administrative matters. Gateway Construction Income Statement For the year ended December 31, 2010 Sales P3.003,000 Less expenses: Utilities P24.000 Machin operators 218.000 Rent. office building 24.000 CPA fees 20.000 Other direct labor 265.700 Administrative salaries 114.000 Supervisory salaries 70.000 Pipe 1.401,340 Tires and fuel 418.600 Depreciation, equipment 198,000 Salaries of mechanics 50,000 Advertising 15,000 Total expenses 2.818.640 Income before income tax 184.380