Income statement. a. Company A and Company B have taken different approaches to selling glassware. Company A has decided to make glass stemware that sells for a premium at $16.98 per glass. Company B has decided to make a less expensive glassware (without stems) that sells for $11.98 per glass. Last year Company A sold 847,000 stemmed glasses; Company B sold 1,388,000 glasses. Given the following additional information about each firm, construct an income statement for each company, and see which company had the higher gross margin (revenue minus cost of goods sold), higher EBIT, higher taxable income, higher net income, and higher OCF. b. Company B is thinking of upgrading the quality of its glassware. Doing so will cause its cost per unit to rise by 18%, but it believes it can raise its price by 25%. Its sales volume will fall by 15% (85% of its current volume). However, letting the market know that it has better-quality glassware will require a doubling of the current selling, general, and administrative expenses. Using a spreadsheet, redo the income statement for this scenario. Does it improve net income and operating cash flow for Company B? How does the company now compare to Company A? Required: In the spreadsheet, use a separate cell for each piece of information, and then construct the income statement by using a formula or cell reference for each individual line of the statement. Information Units sold Revenue per unit Cost per unit of glassware Fixed costs Selling, general, and administrative expenses Depreciation expense Interest expense Tax rate Company A Company B Company B (stemware) (without stems) (upgrading quality) 847,000 1,388,000 1,179,800 16.98 $ 11.98 $ 14.98 8.17 $ 6.69 $ 7.89 1,245,788.00 $ 1,354,218.00 $ 1,354,218.00 785,038.00 $ 584,431.00 $ 1,168,862.00 1,489,374.00 $ 1,137,890.00 $ 1,137,890.00 501,030.00 $ 698,540.00 $ 698,540.00 37.5% 37.5% 37.5% $ Solution Parts a and b Company A Part a Company B Part b Company B Income Statement Revenue Cost of goods sold Gross margin or profit Fixed costs Selling, general, and administrative expenses Depreciation expense EBIT Interest expense Taxable income Taxes Net income Operating cash flow (OCF) $ $ $ 1,245,788.00 $ 785,038.00 $ 1,489,374.00 $ 1,354,218.00 584,431.00 1,137,890.00 $ $ $ 1,354,218.00 1,168,862.00 1,137,890.00 a. Given the information about each firm, construct an income statement for the two companies, and see which company had the higher gross margin (revenue minus cost of goods sold), higher EBIT, higher taxable income, higher net income, and higher OCF. Company B has EBIT, taxable income, and net income, but it gross margin and OCF. b. Company B is thinking of upgrading the quality of its glassware. Does it improve net income and operating cash flow for Company B? How does the company now compare to Company A? Company B has EBIT, taxable income, net income, gross margin, and OCF after upgrading the glassware quality
