Question

Reid’s Rides sells high quality BMX bikes for $485 each. The cost to produce the bikes average $335.00 each. Depreciation expenses run $2,000 per year. Utilities average $1100 per month, insurance is $2,475 per year, vehicle gas averages $85 per month, phone and internet is $255 per month and rent is $2,000 per month. Vehicle license and other fees are $795 per year. In addition, Reid has a budget for tools at $75 per month. Last year Reid sold 597 bikes. Part time help is $7,800 per year. Reid has the following assets, miscellaneous parts $8,955, tools $4,600 delivery/service truck $22,000, office equipment, display racks, computers, phones all equal $17,000 with an inventory of 80 completed bikes. The company has a five-year loan. The loan amount at the start of the year was $55,000 with an interest rate of 6.5%. Accumulated depreciation in the amount of $15,000. Operating cash is $10,000, additionally he has cash in savings of $30,000. His tax rate is 24%. Reid averages $4,500 in accounts receivable and $2,000 in accounts payable. Reid operates as a sole proprietorship.

Income Statement

Income Statement
Sales Revenue (597* $485)	$289,454
Less: Variable Cost (597* $335)	$199,995
Contribution Margin	$89,550
Less: Fixed Costs
Depreciation	$2,000
Utilities ($1,100*12)	$13,200
Insurance	$2,475
Vehicle Gas ($85*12)	$1,020
Phone & Internet ($255*12)	$3,060
Rent ($2,000*12)	$24,000
Vehicle License	$795
Tools ($75*12)	$900
Part-Time Helpers	$7,800
Total Fixed Costs	$55,250
Net Income before interest & tax	$34,300
Less: Interest Expenses ($55,000*6.5/100)	$3,575
Net Income Before Tax	$30,725
Less: Tax @ 24%	$7,374
Net Income After Tax	$23,351

Balance Sheet

Balance Sheet
	Dollar Amount	Assets	Dollar Amount
Loans	$55,000	Cash ($10,000+$30,000)	$40,000
Accounts Payable	$2,000	Accounts Receivable	$4,500
Retained Earnings	$23,351	Inventory (80*$335)	$26,800
		Office Equipment	$17,000
		Miscellaneous Parts	$8,956
		Tools	$4,600
		Delivery Trucks	$22,000
		Less: Account Depreciation	(15,000)

Break-even point in units= fixed cost/ contribution per unit

Fixed Cost	Figures	Total
Utilities	$1,100*12	$13,200
Insurance	Given	$2,475
Vehicle Gas	$85*12	$1,020
Phone & Internet	$255*12	$3,060
Rent	$2,000*12	24,000
Vehicle License& Other	Given	$795
Part-Time Help	Given	$7,800
Interest on Loan	$55,000*6.5%	$3,575
Total Fixed Cost		$55,925

Contribution per unit= Sales price – Variable cost per unit

Contribution per unit= $485-$335= $150

Break-even point in units= $55,925/ $150= 373 units

QUESTION:

How many bikes must Reid Sell to make a profit of $30,000 and for $50,000? (Make sure to include depreciation and taxes)?

Reid believes sales will increase by 10% next year. In addition he expects cost of goods sold to increase by 3% and other expenses to increase by 5%. (Loan payments remain the same) The owner wants a profit of $30,000. Construct an Income Statement that reflects the increase in sales.?

Answer 1

The no of bikes to be sold for making a profit of $30000 is as follows :

Mr Reid wants after tax profit of $ 30000, therefor profit before tax would be 30000*100/76 = 39473.68. The fixed costs and interest would remain the same irrespective of no of units produced or sold. Fixed costs = $55250 + Interest $3575. Hence the contribution margin should be $ 39473.68+$55250+$3575 = $ 98298.

Suppose the no of units to be sold is x than the contribution margin is 485x - 335x = $ 98298

=150x = $ 98298

x = $ 98298/150

= 655.32 ~ 656

To make profit of $ 30000 Reid should sell 656 bikes.

The no of bikes to be sold for making a profit of $50000 is as follows :

Mr Reid wants after tax profit of $ 30000, therefor profit before tax would be 50000*100/76 = 65789.47. The fixed costs and interest would remain the same irrespective of no of units produced or sold. Fixed costs = $55250 + Interest $3575. Hence the contribution margin should be $ 65789.47+$55250+$3575 = $ 124614.50.

Suppose the no of units to be sold is x than the contribution margin is 485x - 335x = $ 124614.50

=150x = $ 124614.50

x = $ 124614.50/150

= 830.76 ~ 831

To make profit of $ 50000 Reid should sell 831 bikes.

Below is the income statement as per Reid's projections

Income Statement(In $)	Current Year	Increase	Next Year(D*E)
Sales Revenue(597*485)	289545	110%	3,18,499.50
Less : Variable cost (597*335)	199995	103%	2,05,994.85
Contribution Margin	89550		1,12,504.65
Less : Fixed Costs
Depreciation	2000	105%	2,100.00
Utilities ($1,100*12)	13200	105%	13,860.00
Insurance	2475	105%	2,598.75
Vehicle Gas ($85*12)	1020	105%	1,071.00
Phone & Internet ($255*12)	3060	105%	3,213.00
Rent ($2,000*12)	24000	105%	25,200.00
Vehicle License	795	105%	834.75
Tools ($75*12)	900	105%	945.00
Part-Time Helpers	7800	105%	8,190.00
Total Fixed Costs	55250		58,012.50
Net Income before interest & tax	34300		54,492.15
Less: Interest Expenses ($55,000*6.5/100)	3575		3,575.00
Net Income Before Tax	30725		50,917.15
Less: Tax @ 24%	7374		12,220.12
Net Income After Tax	23351		38,697.03