Village Bakeries Inc. has been producing various breads for the Barbadian Market. The covid pandemic and changing customer taste has affected their main revenue stream. A decision was made to introduce a healthy line of pastries during the last two years. This line has been growing slowly, however, the Ministry of Education has contacted the management with a proposal to supplement the supply of pastries for the school meals program. This would require management to utilize 25% of the current productive capacity to satisfy this order. The Ministry is to sign a bread contract for five years (5) in the first instance with the potential for renewal if the service delivery and quality is maintained over the life of the contract. Information on this contract is given in the table below.

Revenues
Breads	23,500,000
Pastries	625,000
Total revenues		24,125,000
Cost of goods sold		15,625,000
Gross profit		8,500,000
Operating expenses
Quality testing and assurance	715,225
Marketing cost	1,025,380
Distribution cost	604,275
Customer service cost	247,130
Administrative cost	2,517,360
Retirement cost	470,000
Total operating cost		5,579,370
Operating income		2,920,630

Additional information for bread Production.

The reduction in sales listed above will affect related variable cost of goods sold. The fixed manufacturing overhead will not be affected by this reduction in sales. The variable cost of goods sold for the existing pastries is 55% of related revenue. Pastries cost of goods sold is included in the total cost of goods sold. The manufacturing overhead which relates to all products is 40% variable and 60% fixed. Management expects that the competition in the bread market will keep prices unchanged for the next year. The sales of pastries to the market is expected to grow by 15% with no increases in the related variable costs.

The management accountant has provided the following information to assist in the preparation of the budget for the next year for bread production.

• The direct material is 40% of the Bread sales revenue.
• There will be a 5% reduction in material cost as a result of an increase material purchases to satisfy the government contract.
• Direct labour which is 25% of bread related cost of goods sold will decrease by 10% due to the new automated system which also provides a 12% decrease in the total variable overhead.
• Quality Testing and Assurance is a key cost and due to the government contract will increase by 15%. Marketing cost will decrease by 10 %.
• Interest cost will also increase by 3.5% due to increases in the cost of borrowings.
• The other operating expenses will be reduced as follows: Customer service cost 2.5%, distribution cost 3.5% and administrative cost 4%.

The projected information for the Ministry of Education Contract:

Contracted sales in units Per year	60,000
Contract selling price per unit package of 6	$60.00
Average material cost per package	$20.00
Labour cost per package	$14.00
Batch levels cost per batch	$3,000.00
Number of packages per batch	500

Required

Prepare the budgeted income statement for the Village Bakery if costing adjustments are realized for the next year and including the government contract based on the sales and cost estimates.