Question

Varmit-B-Gone is a pest control service that operates in a suburban neighborhood. The company attempts to make service calls at least once a month to all homes that subscribe to its service. It makes more frequent calls during the summer. The number of subscribers also varies with the season. The number of subscribers and the average number of calls to each subscriber for the months of interest follow:

	Subscribers			Service calls (per subscriber)
March		800			0.6
April		900			0.9
May		1,600			1.5
June		1,800			2.5
July		1,800			3.0
August		1,500			2.4

The average price charged for a service call is $80. Of the service calls, 30 percent are paid in the month the service is rendered, 60 percent in the month after the service is rendered, and 8 percent in the second month after. The remaining 2 percent is uncollectible.

Varmit-B-Gone estimates that the number of subscribers in September should fall 10 percent below August levels, and the number of service calls per subscriber should decrease by an estimated 20 percent. The following information is available for costs incurred in August. All costs except depreciation are paid in cash.

Service costs
Variable costs	$	26,000
Maintenance and repair		24,000
Depreciation (fixed)		44,000
Total	$	94,000
Marketing and administrative costs
Marketing (variable)	$	16,500
Administrative (fixed)		57,000
Total	$	73,500
Total costs	$	167,500

Variable service and marketing costs change with volume. Fixed depreciation will remain the same, but fixed administrative costs will increase by 5 percent beginning September 1. Maintenance and repair are provided by contract, which calls for a 1 percent increase in September.

Required:

Prepare a budgeted income statement for September. (Round intermediate calculations to 2 decimals places.)

Answer 1

In this question, we need to prepare Budgeted Income Statement.

VARMIT-B-GONE

BUDGETED INCOME STATEMENT

FOR THE MONTH OF SEPTEMBER

Service Revenue (Working Note 1)		$207,360
Less:
Service Cost:
Variable Service Cost (Working Note 2)	$18,720
Maintenance and repair (24,000 * 1.01)	$24,240
Fixed Costs - Depreciation	$44,000
Total Service Cost	$86,960
Marketing and Administrative costs:
Variable Marketing Costs	$11,880
Fixed Administrative Costs (57,000 * 1.05)	$59,850
Total Marketing and administrative costs	$71,730
Total Costs (86,960 + 71,730)		$158,690
Budgeted Income		$48,670

Working Note 1:-

Calculation of Service Revenue

Number of subscribers for september = 1,500 - 10% = 1,500 - 150 = 1,350

Number of service call per subscriber = 2.4 - 20% = 2.4 - 0.48 = 1.92

Number of service call in September = 1,500 * 1.92 = 2,592

Service Revenue = 1,350 * 1.92 * $80 = $207,360

Working Note 2:-

Calculation of Variable Service Cost

Number of service call in August = 1,500 * 2.4 = 3,600

Variable Service Cost = (26,000 / 3,600) * 2,592 = $18,720

Working Note 3:-

Calculation of Variable Marketing Costs

Variable Marketing Cost = (16,500 / 3600 * 2,592) = $11,880

Thank You..

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