Required [2+(5+2)+2+(5+3+2+2+2+2+3) = 30 points] 1. What conceptual errors, if any, were made in preparing the income statement above? 2. (a) Prepare a schedule of cost of goods manufactured for the first quarter. (b) Prepare a corrected income statement for the first quarter. Your statement should show in detail how the cost of goods sold is computed. 3. Do you agree that the insurance company owes Solar Technology, Inc., $226,000? Explain. 4. Assume that the following are the list and nature of the costs of Solar Technology for 40,000 batteries produced during the year 2021. (a) Complete the table below (assume the given cost figures are for 40,000 units): Nature of cost Compute Cost Per unit Total variable cost Fixed cost Cost ? ? ? ? ? ? ? Admin salaries & commission (note) Advertising Maintenance, production Indirect labor cost Cleaning supplies, production Raw materials cost Rental cost, facilities Insurance, production Depreciation, office equipment Utilities Depreciation, production equipment Direct labor cost Total $110,000 Mixed 90,000 Fixed 48,000 Variable 64,000 Variable 16,000 Variable 256,000 Variable 75,000 Fixed 8,000 Fixed 26,000 Fixed 80,000 Fixed 57,000 Fixed 64,000 Variable ? ? ? ? ? ? ? Note: Quarterly admin salaries and commission for the year 2020 against different sales levels were: Quarter 1 Quarter 2 Quarter 3 Quarter 4 Units produced and sold 20,000 18,000 25,000 42,000 Cost ($) 94,000 92,400 98,000 111,600 (b) Prepare an income statement under contribution format for 32,000 units sold. @) Why the profits under Requirement 2(b) and requirement 4 (b) are different? Explain your understanding in short. (d) Compute the variable cost ratio and contribution margin ratio for Solar Technology Inc. (e) What is the breakeven point of the company? (1) If the company wants to earn a target profit of $36,000 a quarter, how many units they have to sale in a quarter? (g) To improve the performance of the company, Solar Technology is evaluating different alternatives as stated below. Which proposal do you support? Why? Show all necessary calculation for the each of the proposals. Proposal 1: Roger Strong proposed that an introduction of a high-quality circuit will increase the production cost by $2 but will help boosting sales volume by 20% and could eliminate some fixed cost related to quality inspection by $40,000. Proposal 2: Looking at the production costs, the operations manager suggested that a part of the product may be purchased from outside vendors instead of producing it in the factory. The purchase price per unit of that part is expected to be $3 whereas the existing variable cost may decrease by $5 per unit. This action will increase inspection cost $20,000 per quarter and may reduce sales volume by 5%. Proposal 3: The CEO of the company believes spending more for advertisement may increase sale. He suggested to spend $50,000 more which may increase sales volume by 20%. All the Best! SOLAR TECHNOLOGY INC "I was sure that when our battery hit the market it would be an instant success," said Roger Strong, founder and president of Solar Technology, Inc. But just look at the profit for the quarter. It's obvious that we're better scientists than we are businesspeople." The data to which Roger was referring follow: Income Statement For the Quarter Ended March 31, 2021 $960,000 Sales (32,000 batteries) Less operating expenses: Admin salaries and commission Advertising Maintenance, production Indirect labor cost Cleaning supplies, production Purchases of raw materials Rental cost, facilities Insurance, production Depreciation, office equipment Utilities Depreciation, production equipment Direct labor cost Total operating expenses Net operating income $110,000 90,000 48,000 64,000 16,000 360,000 75,000 8,000 26,000 80,000 57,000 64,000 998,000 ($38,000) "At this rate, we'll be out of business within a year," said Cindy Zhang, the company's accountant. "But I've double-checked these figures, so I know they're right." Solar Technology was organized last year to produce and market a revolutionary new solar battery. The company's accounting system was set up by Margie Wallace, an experienced accountant who recently left the company to do independent consulting work. The statement above was prepared by Zhang, her assistant. "We may not last a year if the insurance company doesn't pay the $199,600 it owes us for the 8,000 batteries lost in the warehouse fire last week," said Roger. "The insurance adjuster says our claim is inflated, but he's just trying to pressure us into a lower figure. We have the data to back up our claim, and it will stand up in any court. On April 3, just after the end of the first quarter, the company's finished goods storage area was swept by fire and all 8,000 unsold batteries were destroyed. (These batteries were part of the 40,000 units completed during the first quarter.) The company's insurance policy states that the company will be reimbursed for the "cost" of any finished batteries destroyed or stolen. Zhang has determined this cost as: (Total cost for the quarter, $998,000 - Batteries produced during the quarter, 40,000) = $24.95 per unit Cost of 8,000 batteries: 8,000 batteries x $24.95 =$199,600 The following additional information is available on the company's activities during the quarter end: a. Inventories at the beginning and end of the quarter were as follows: Beginning of the quarter End of the quarter Raw materials $104,000 Work in process 37,000 Finished goods ? 0 b. Eighty percent of the rental cost for facilities and 90% of the utilities cost relate to manufacturing operations. The remaining amounts relate to selling and administrative activities. Required [2+(5+2)+2+(5+3+2+2+2+2+3) = 30 points] 1. What conceptual errors, if any, were made in preparing the income statement above? 2. (a) Prepare a schedule of cost of goods manufactured for the first quarter. (b) Prepare a corrected income statement for the first quarter. Your statement should show in detail how the cost of goods sold is computed. 3. Do you agree that the insurance company owes Solar Technology, Inc., $226,000? Explain. 4. Assume that the following are the list and nature of the costs of Solar Technology for 40,000 batteries produced during the year 2021. (a) Complete the table below (assume the given cost figures are for 40,000 units): Nature of cost Compute Cost Per unit Total variable cost Fixed cost Cost ? ? ? ? ? ? ? Admin salaries & commission (note) Advertising Maintenance, production Indirect labor cost Cleaning supplies, production Raw materials cost Rental cost, facilities Insurance, production Depreciation, office equipment Utilities Depreciation, production equipment Direct labor cost Total $110,000 Mixed 90,000 Fixed 48,000 Variable 64,000 Variable 16,000 Variable 256,000 Variable 75,000 Fixed 8,000 Fixed 26,000 Fixed 80,000 Fixed 57,000 Fixed 64,000 Variable ? ? ? ? ? ? ? Note: Quarterly admin salaries and commission for the year 2020 against different sales levels were: Quarter 1 Quarter 2 Quarter 3 Quarter 4 Units produced and sold 20,000 18,000 25,000 42,000 Cost ($) 94,000 92,400 98,000 111,600 (b) Prepare an income statement under contribution format for 32,000 units sold. @) Why the profits under Requirement 2(b) and requirement 4 (b) are different? Explain your understanding in short. (d) Compute the variable cost ratio and contribution margin ratio for Solar Technology Inc. (e) What is the breakeven point of the company? (1) If the company wants to earn a target profit of $36,000 a quarter, how many units they have to sale in a quarter? (g) To improve the performance of the company, Solar Technology is evaluating different alternatives as stated below. Which proposal do you support? Why? Show all necessary calculation for the each of the proposals. Proposal 1: Roger Strong proposed that an introduction of a high-quality circuit will increase the production cost by $2 but will help boosting sales volume by 20% and could eliminate some fixed cost related to quality inspection by $40,000. Proposal 2: Looking at the production costs, the operations manager suggested that a part of the product may be purchased from outside vendors instead of producing it in the factory. The purchase price per unit of that part is expected to be $3 whereas the existing variable cost may decrease by $5 per unit. This action will increase inspection cost $20,000 per quarter and may reduce sales volume by 5%. Proposal 3: The CEO of the company believes spending more for advertisement may increase sale. He suggested to spend $50,000 more which may increase sales volume by 20%. All the Best! SOLAR TECHNOLOGY INC "I was sure that when our battery hit the market it would be an instant success," said Roger Strong, founder and president of Solar Technology, Inc. But just look at the profit for the quarter. It's obvious that we're better scientists than we are businesspeople." The data to which Roger was referring follow: Income Statement For the Quarter Ended March 31, 2021 $960,000 Sales (32,000 batteries) Less operating expenses: Admin salaries and commission Advertising Maintenance, production Indirect labor cost Cleaning supplies, production Purchases of raw materials Rental cost, facilities Insurance, production Depreciation, office equipment Utilities Depreciation, production equipment Direct labor cost Total operating expenses Net operating income $110,000 90,000 48,000 64,000 16,000 360,000 75,000 8,000 26,000 80,000 57,000 64,000 998,000 ($38,000) "At this rate, we'll be out of business within a year," said Cindy Zhang, the company's accountant. "But I've double-checked these figures, so I know they're right." Solar Technology was organized last year to produce and market a revolutionary new solar battery. The company's accounting system was set up by Margie Wallace, an experienced accountant who recently left the company to do independent consulting work. The statement above was prepared by Zhang, her assistant. "We may not last a year if the insurance company doesn't pay the $199,600 it owes us for the 8,000 batteries lost in the warehouse fire last week," said Roger. "The insurance adjuster says our claim is inflated, but he's just trying to pressure us into a lower figure. We have the data to back up our claim, and it will stand up in any court. On April 3, just after the end of the first quarter, the company's finished goods storage area was swept by fire and all 8,000 unsold batteries were destroyed. (These batteries were part of the 40,000 units completed during the first quarter.) The company's insurance policy states that the company will be reimbursed for the "cost" of any finished batteries destroyed or stolen. Zhang has determined this cost as: (Total cost for the quarter, $998,000 - Batteries produced during the quarter, 40,000) = $24.95 per unit Cost of 8,000 batteries: 8,000 batteries x $24.95 =$199,600 The following additional information is available on the company's activities during the quarter end: a. Inventories at the beginning and end of the quarter were as follows: Beginning of the quarter End of the quarter Raw materials $104,000 Work in process 37,000 Finished goods ? 0 b. Eighty percent of the rental cost for facilities and 90% of the utilities cost relate to manufacturing operations. The remaining amounts relate to selling and administrative activities