Problem 10-2 (Part Level Submission) The results of operations for the Handley Bug Spray Manufacturing Company for the fourth quarter of 2017 were as follows (in thousands): Sales of bug spray Less variable cost of goods sold Contribution margin Less fixed bug removal costs Less fixed selling and administrative expenses Income before taxes Less taxes on income Net income $71,400 30,600 $510,000 285,600 224,400 102,000 122,400 48,960 $73,440 Note: Handley uses the variable costing method. Thus, only variable costs are included in the cost of goods sold. Fixed costs are charged to expense in the period incurred. The company's balance sheet as of the end of the fourth quarter of 2017 was as follows (in thousands): Cash Accounts receivable Total current assets Fixtures and equipment Less accumulated depreciation Total assets Liabilities and owners' equity: Accounts payable Retained earnings Common stock Total liabilities and owners' equity Additional information: $ 31,200 255,000 286,200 $135,000 75,000 60,000 $346,200 $ 68,544 167,156 110,500 $346,200 2. 3. 4. 5. 6. 7. Sales and variable costs of sales are expected to increase by 6 percent in the next quarter. All sales are on credit with 50 percent collected in the quarter of sale and 50 percent collected in the fallowing quarter. Variable cost of sales consists of 40 percent materials, 41 percent direct labor, and 19 percent variable overhead. Materials are purchased on credit. 40 percent are paid for in the quarter of purchase, and the remaining amount is paid for in the quarter after purchase. There is no inventory. Also, direct labor and variable overhead costs are paid in the quarter the expenses are incurred. Fixed bug removal costs (other than $5,310 of depreciation expense) are expected to increase by 1.50 percent. Fixed bug removal costs requiring payment are paid in the quarter they are incurred. Fixed selling and administrative costs (other than $2,840 of depreciation expense) are expected to increase by 2 percent. Fixed selling and administrative costs requiring payment are paid in the quarter they are incurred. The tax rate is expected to be 40 percent. All taxes are paid in the quarter they are incurred. No purchases of fixtures or equipment are expected in the first quarter of 2018.