Question

Ivanhoe Industries manufactures sump-pumps. Its most popular product is called the Super Soaker, which has a retail price of $1,280 and costs $540 to manufacture. It sells the Super Soaker on a standalone basis directly to businesses. Ivanhoe also provides installation services for these commercial customers, who want an emergency pumping capability (with regular and back-up generator power) at their businesses. Ivanhoe also distributes the Super Soaker through a consignment agreement with Menards. Income data for the first quarter of 2020 from operations other than the Super Soaker are as follows.

Revenues		$8,630,000
Expenses		7,345,000

Ivanhoe has the following information related to two Super Soaker revenue arrangements during the first quarter of 2020.

1.		Ivanhoe sells 30 Super Soakers to businesses in flood-prone areas for a total contract price of $55,800. In addition to the pumps, Ivanhoe also provides installation (at a cost of $160 per pump). On a standalone basis, the fair value of this service is $220 per unit installed. The contract payment also includes a $10 per month service plan for the pumps for 3 years after installation (Ivanhoe’s cost to provide this service is $8 per month). The Super Soakers are delivered and installed on March 1, 2020, and full payment is made to Ivanhoe. Any discount is applied to the pump/installation bundle.
2.		Ivanhoe ships 300 Super Soakers to Menards on consignment. By March 31, 2020, Menards has sold two-thirds of the consigned merchandise at the listed price of $1,280 per unit. Menards notifies Ivanhoe of the sales, retains a 5% commission, and remits the cash due Ivanhoe. 1.) Determine Ivanhoe Industries’ 2020 first-quarter net income. (Ignore taxes.) 2.) Determine free cash flow for Ivanhoe Industries for the first quarter of 2020. In the first quarter, Ivanhoe had depreciation expense of $193,000 and a net increase in working capital (change in accounts receivable and accounts payable) of $275,000. In the first quarter, capital expenditures were $502,000; Ivanhoe paid dividends of $131,000.

Answer 1

Calculation of profit on direct business order

Particulars	Per unit	Amount (in $)
Nos. of units		30
Contract Price		55,800
Manufacturing cost	540	16,200
Installation cost	160	4,800
Service cost per month	8	288
Total Cost		21,288
Total Profit		34,512

Note: It is assumed that revenue of service plan is booked in the month of contract agreement i.e. booked in the month of March, not deferred to all 36 months.

Calculation of profit on consignment

Particulars	Per unit	Amount (in $)
Units sold		200
Sales value	1280	256,000
Manufacturing cost	540	108,000
Commission	5%	12,800
Total Cost		120,800
Total Profit		135,200

1. Calculation of Q1 net income

Particulars	Amount (in $)
Other than Super soaker
Revenue	8,630,000
Expenses	7,345,000
Income                               (A)	1,285,000
From Super soaker
Direct Business	21,288
Consignment	135,200
Total                                    (B)	156,488
Total Income                 (A+B)	1,441,488

Note: Assuming depreciation expenses already included in expense and manufacture cost.

2. Calculation of Free cash flow

Particulars	Amount (in $)
Income	1,441,488
Add: Depreciation	193,000
Less: Increase in Working Capital	(-)275,000
Cash flow from Operating activity	1,359,488
Less: Capital expenditure	502,000
Free cash flow	857,488