On January 1, 2020, John Smith launched a computer services company, Technology Business Solutions that organized as a corporation and provides computer consulting services and computer system installations. Smith adopts the calendar year for reporting purposes. After the initial success of the company, John Smith continues to operate Technology Business Solutions and has expanded into computer systems manufacturing and sales. They are currently contracting with several large businesses to develop and construct their IT systems. 1. The company wants to see its income statement for the current month, August, (Comprehensive Problem 1) in the contribution format. The Income Statement for the previous month, July 2020, is given below: Sales $125,250 Cost of goods sold 93,336 Gross Margin 31,914 Selling and administrative expenses: Selling expense 31,000 Utility Expense 5,500 Depreciation Expense 6,000 Executive Salaries Expense 42,000 84,500 Net operating income $-52,586 The company completed and sold 3 systems in July. Required: 1. Answer the following questions: a. State which expenses from the Income Statement are fixed, variable and mixed and, by use of the high-low method, separate each mixed expense into its variable and fixed components. STATE the COST FORMULA for each mixed expense. The company completed and sold 8 systems in August. Show all Calculations! b. Complete the company's contribution format income statement for AUGUST. 2. Using the contribution format income statement from #1 for August, answer the following questions: (round all answers to two decimal places (if appropriate) (Show all calculations!) c. What is the contribution margin per unit? d. What is the contribution margin ratio? e. What is the variable expense ratio? f. If sales increase to 11 units, what would be the increase in net operating income? g. If sales decline to 7 units, what would be the net operating income? h. What is the break-even point in unit sales? i. What is the break-even point in dollar sales? j. How many units must be sold to achieve a target profit of $100,000? k. What is the margin of safety in dollars? What is the margin of safety percentage? 1. What is the degree of operating leverage? m. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales? Use Sensitivity Analysis to answer n through p (each scenario is independent of any other, refer to the original August information for each). n. Refer to the original data in (1) above. Assume the sales manager believes a 10% increase in variable unit selling expenses will increase sales volume. If the sales volume increases by 28.5%, what will be the chane ases by 28.5%, what will be the change in net operating income? Is this a good idea, why or why not? o. Refer to the original data in (1) above. Assume the marketing manager believes that an increase in advertising and better quality material increase sales volume by 40%. If this change increases the per unit variable production costs by fixed selling expenses increase by 12% what will be the new break-even point in dollar salesr change Income? Is this a good idea, why or why not? p. Refer to the original data in (1) above. Using the degree of operating leverage calculated above (round two decimal places), what would net income be if sales increase by 20%? Verify your calculation using the contribution format income statement. Technology Business Solutions Income Statement For the Month Ended August 2020 $334,000 217,774 116,226 Sales Cost of goods sold Adjusted cost of goods sold Gross margin Selling and administrative expenses: Administrative salaries expense Selling expense Utility Expense Depreciation expense Net operating income 42,000 44,000 5,500 6,000 97,500 18.726
