Question

Jordan and Taylor became friends after meeting on a reality cooking show. They have recently decided to start an Internet business to sell their delicious chocolate brownies. Their knowledge of business, unlike their totally awesome culinary skills, is questionable. Knowing that you are accounting students, they will be asking you advice now and then.

You received a text that Jordan and Taylor were on their way. When they arrived, you could smell the aroma of fresh baked brownies. You are glad that you purchased a gallon of milk earlier in the day. Jordan hands you a list of ingredients for their special recipe. Meanwhile, Taylor is concerned that more than just their labor and ingredients should be taken into consideration to properly gauge a selling price.

An Internet gourmet foods company, “Yumminess”, will be including “Chocolate Attack Brownies” (CAB) in their online catalog. CAB will be sold in square tins and captioned with personal greetings. Jordan negotiated a selling price to Yumminess at $10 per tin.

The product cost is $8 per tin, which includes $6 of direct material and $1.50 of direct labor. Annual manufacturing overhead is estimated at $100,000 for the expected sales of 200,000 tins. Operating expenses are projected to be a fixed annual amount of $80,000.

1. What is the predetermined overhead rate per tin?

2. If 200,000 tins are sold, was is the total Gross Profit?

3. If 200,000 tins are sold, was is the total Net Income?

4. Taylor thinks sales are understated by 50,000 tins. Create an income statement based on Taylor’s sales volume of 250,000 tins. Your income statement should include a heading and amounts for sales, cost of goods sold, gross profit, operating expenses, and net income. All amounts need to have the correct captions. Make sure you properly account for any over- or under-applied manufacturing overhead.

Answer 1

1)Predetermined Overhead rate per tin
Estimated Annual manufacturing overhead=$100,000
Expected sales=200,000 tins
Therefore, Predetermined Overhead rate per tin=
100,000/200,000
=	0.5
2) If 200,000 tins are sold, was is the total Gross Profit?
200000*10 per unit =2,000,000			=Total sales
Cost per tin= $8
Total costs=8*200000= 1,600,000
Gross profit=2,000,000-1,600,000=400,000
3) If 200,000 tins are sold, was is the total Net Income?
Fixed operating expenses= $80,000
Therefore, Net profit= Gross Profit - Fixed Costs
400000-80,000= 320,000

4)

Income Statement for Chocolate attack brownies (CAB)
Year ended December 31
	200,000 tins	250,000 tins
Sales	2,000,000	2,500,000
COGS	1600000	1975000
Gross Profit	400,000	525,000
Operating Expenses	80,000	80,000
Net Profit	320,000	445,000
Or Income Statement for Chocolate attack brownies (CAB) Year ended December 31 Sales                    2,500,000 COGS                    1,975,000 Gross Profit                        525,000 Operating Expenses                          80,000 Net Profit                        445,000
Notes:
Predetermined Overhead rate per tin will change
100,000/250,000
=	0.4
Therefore Cost per tin will be $7.9 if number of tins sold increases by 50,000