Karen's Canoes

Income Statement

INCOME STATEMENT No Change $\%$ of Sales With Change Assumptions

Sales $300100\mathrm{.}00\%345$ Given

Variable Costs

Material $100$

Labor $70$

Overhead $($Variable Portion$)5$

Selling Expense $15$

Collection Exp $($Variable Portion$)5$

Total Variable Costs $195$

$201$

Total Fixed Costs $6$

Profit before Credit Costs $1)$

Opportunity Cost of Investment in A$/$R See below $2)$

Opportunity Cost of Investment in Inv See below $3)$

Opportunity Cost of Bad Debts Expense $2$x per problem $4)$

EBT

Opportunity Cost of Investment in A$/$R $=$ DSO $*$ Sales$/$Day $*$ Var Cost Ratio $*$ Cost of Funds $=$ Total

Old Policy

New Policy

Opportunity Cost of Investment in Inventory $=$ Change in Sales $*$ COGS $\%/$ Annual Inv T$/$O $*$ Cost of Funds $=$ Total

New Policy

Assignment:

Determine the expected change in before$-$tax profit for the proposed change in credit standards.

Prepare the income statements in total, not per unit. The following information should be used in your

analysis.

$1.$ Sales occur evenly throughout the year.

$2.$ The firm is currently operating under$-$capacity.

$3.$ Opportunity cost of Inventory Investment$=$

Change in Annual Sales x COGS $\%$ X r

Annual Inventory Turnover

Karen$$s Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are

expected to increase $15\%$ from $300$ canoes per year to $345$ canoes per year. The average collection

period is expected to increase to $40$ days from $30$ days and bad debts are expected to double the

current level $($as a $\%$ of sales$).$ To support the higher sales level, an increase in the level of inventory will

be necessary. The firm$$s required return on investment is $6\%$ and their annual inventory turnover is $3$

times. Their COGS $\%$ is $58\mathrm{.}33\%.$

The current standard cost data is shown below.

Sales Price $($per canoe$)$ $$300\mathrm{.}00$

Variable Costs $($per canoe$)$:

Material $100\mathrm{.}00$

Labor $70\mathrm{.}00$

Overhead $5\mathrm{.}00$

Selling Expense $15\mathrm{.}00$

Collection Expense $5\mathrm{.}00$

Total VC Costs $($per canoe$)195\mathrm{.}00$

Bad Debts $2\%$ of

sales