Question

Bill’s costs are simple. Clay costs $1.35 and glazing $0.60 per pitcher. Bill rents kiln time at a fixed price of $125 per month. In addition to the commission he also pays the museum a display space fee of $100 per month. The museum shop takes an 8% commission. (That means that 8% of his revenues are owed to the museum shop.)

On an Excel worksheet, create an income statement model that will compute Bill’s profit for a month. Please use that model to calculate

1. his profit if he charges $60 per pitcher and he sells 59 pitchers per month
2. his profit if he charges $65 per pitcher and he sells 55 pitchers per month
3. which is better?

Answer 1

Ans a.
Bill's Monthly Income Statement
Particulars	Units	Unit Rate	Amt $
Sales Revenue	59	$                      60.00	$                 3,540.00
Less Variable Costs
Clay Cost	59	$                        1.35	$                       79.65
Glazing cost	59	$                        0.60	$                       35.40
Museum Commission @8% on sales	59	$                        4.80	$                    283.20
Total Variable costs			$                    398.25
Contribution Margin			$                 3,141.75
Monthly Fixed Costs
Kiln time rental			$                    150.00
Museum display space fee			$                    100.00
Total Fixed costs			$                    250.00
Operating Income /(Loss)			$                 2,891.75
Ans b.
Bill's Monthly Income Statement
Particulars	Units	Unit Rate	Amt $
Sales Revenue	55	$                      65.00	$                 3,575.00
Less Variable Costs
Clay Cost	55	$                        1.35	$                       74.25
Glazing cost	55	$                        0.60	$                       33.00
Museum Commission @8% on sales	55	$                        5.20	$                    286.00
Total Variable costs			$                    393.25
Contribution Margin			$                 3,181.75
Monthly Fixed Costs
Kiln time rental			$                    150.00
Museum display space fee			$                    100.00
Total Fixed costs			$                    250.00
Operating Income /(Loss)			$                 2,931.75
Ans c.
Model b is better as it results in higher operating income of $40 per month.