Question 2 Jonathan is reviewing the activities for the past year. Sleep Well Inc. rents a small administrative office in Melbourne's central business district (CBD) for $40,000 per year and a large warehouse in Geelong for $60,000 per year. Sleep Well Inc. has a staff handling all the administrative work in the office in CBD, and pays the staff with an annual salary of $60,000. Sleep Well Inc. has hired a professional marketing firm for managing the sales and this marketing firm charges a commission of $15 for each completed sale; each sale equals one bed sold. The invoicing system used by Sleep Well is outsourced and for each sale completed the outsourced firm charges $5; each sale equals one bed sold. The miscellaneous cost that incurred in the administrative office was $4,000, mostly costs with the lease of material and stationery, and this yearly cost is expected to remain the same amount for years to come. In the warehouse in Geelong there is one full-time employee who gets paid $80,000 per year for supervising the casual staff working in the warehouse. The warehouse had miscellaneous costs of $8,000 in the past year and is expected to remain the same amount for years to come. Sleep Well Inc. has a contract with a delivery firm for delivering the beds to their clients, but Jonathan is not able to find the contract and is not sure how much the delivery firm charges per transaction. The only information he can gather is regarding the past few years: Table 1 - Annual unit delivery and costs Year Delivery Cost Units Delivered 2016 470 550 2017 $758 $870 $940 $1,010 600 2018 2019 650 Below is a table listing all the material used during the past year to manufacture 500 beds and the costs incurred. There was no stock or work in process in the beginning or end of the year. Table 2 - Material costs Material Quantity Total Cost Fabric 1,500 m2 $3,000 Timber 6000 Units $36,000 Foam 500 Kilograms $500 Button stud 5,000 Units $500 Varnish 500 Litres $10,000 Bolt 5,000 Units $500 The manufacturing activity is made by casual staff. The first stage is the woodworking, where a carpenter is hired by $20 per hour for working with the timber. This task is very labour intensive and for preparing the material a carpenter takes 5 hours per bed. Once the timber is ready for being assembled, a casual staff is paid $30 per hour for assembling the bed frame with the bolts and then adding (fabric, foam, and button studs) to make the mattress attached to the bed frame. The assembling takes only 2 hours per bed. The final stage of manufacturing is varnishing the bed frame. A casual staff is paid $30 per hour for varnishing the bed frame and this task takes 1 hours. Question 3 To have a better picture of what has happened during the previous year, Koren and Jingran want to figure out the operating profit for Sleep Well Inc., and Jonathan has asked you to provide him with this information. The beds are sold for $900 each. When preparing the income statements, please break down the information as much as you can. Keep in mind you are not preparing reports for financial accounting, so break down the cost items as much as possible. Required a) Prepare a variable-costing income statement for the previous year for Sleep Well Inc. (e.g., Panel A, Exhibit 7.3, Chapter 7,5 marks) b) Prepare an absorption-costing income statement for the previous year for Sleep Well Inc. (e.g., Panel B, Exhibit 7.3, Chapter 7,5 marks)
