Question
The results of operations for the Covington Bug Spray Manufacturing Company for the fourth quarter of 2017 were as follows (in thousands): Sales of bug
The results of operations for the Covington Bug Spray Manufacturing Company for the fourth quarter of 2017 were as follows (in thousands):
Sales of bug spray
$560,000Less variable cost of goods sold
313,600Contribution margin
246,400
Less fixed bug removal costs
$78,400
Less fixed selling and administrative expenses
33,600112,000Income before taxes
134,400Less taxes on income
53,760Net income
$80,640
Note:Covington uses the variable costing method. Thus, only variable costs are included in the cost of goods sold. Fixed costs are charged to expense in the period incurred.
The company's balance sheet as of the end of the fourth quarter of 2017 was as follows (in thousands):
Assets:
Cash
$31,500Accounts receivable
280,000Total current assets
311,500
Fixtures and equipment
$130,000Less accumulated depreciation
80,00050,000Total assets
$361,500
Liabilities and owners' equity:
Accounts payable
$62,720Retained earnings
189,980Common stock
108,800Total liabilities and owners' equity$361,500
Additional information:
1.Sales and variable costs of sales are expected to increase by 5 percent in the next quarter.
2.All sales are on credit with 50 percent collected in the quarter of sale and 50 percent collected in the following quarter.3.Variable cost of sales consists of 40 percent materials, 41 percent direct labor, and 19 percent variable overhead. Materials are purchased on credit. 50 percent are paid for in the quarter of purchase, and the remaining amount is paid for in the quarter after purchase. There is no inventory. Also, direct labor and variable overhead costs are paid in the quarter the expenses are incurred.4.Fixed bug removal costs (other than $4,730 of depreciation expense) are expected to increase by 1.50 percent. Fixed bug removal costs requiring payment are paid in the quarter they are incurred.5.Fixed selling and administrative costs (other than $2,990 of depreciation expense) are expected to increase by 2 percent. Fixed selling and administrative costs requiring payment are paid in the quarter they are incurred.6.The tax rate is expected to be 40 percent. All taxes are paid in the quarter they are incurred.
7.No purchases of fixtures or equipment are expected in the first quarter of 2018.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started