Question

3.

EASTDALE INDUSTRIES INC.

STATEMENT OF INCOME

FOR THE YEAR ENDED MARCH 31, 2020

​​​​​​​​   2020   ​​   2019   

Sales revenue​​​​​​$1,095,000​​$750,000

Cost of goods sold​​​​​​     635,100​​  435,000

Gross profit​​​​​​​     459,900​​  315,000

Expenses

  Depreciation​​​​​​   29,520​​   24,000

Office supplies​​​​​​   2,200​​   1,600

Salaries and benefits​​​​​   112,850​​  102,500

Rent​​​​​​​​   18,000​​   18,000

  Utilities​​​​​​​       27,192​​ 20,200

​​​​​​​​     189,762​​166,300

Operating income​​​​​​     270,138​​  148,700

Income tax expense​​​​​​     59,430​​   32,714​

Net income​​​​​​​$   210,708​​$ 115,986

Additional information:

Unit sales for 2020 and 2019 were 8,760 and 6,000 units, respectively.

Required:

5​a) For each cost in the above income statement, identify whether the cost is fixed, variable and mixed with respect to sales volume, and explain how this was determined.

1​b) Determine a reasonable cost driver for income tax expense. That is, what is the nature of the activity that would cause income tax expense to vary?

2​c) Select one mixed cost and prepare a scattergraph. From the scattergraph, use the visual fit method to determine the total fixed cost and variable cost per unit.

6​d) For the remaining mixed costs, determine the fixed and variable component of each cost using the high-low method. Why is the preparation of a scattergraph of no benefit given the information you have available?

2​e) Based on your knowledge of depreciation methods from financial accounting, give a reasonable explanation of the cost structure of depreciation expense that you have identified earlier.

7​f) Using a contribution format, prepare a budgeted income statement for 2021 if 9,600 units are expected to be sold. Stop at the calculation of operating income, so no income tax expense need be calculated.

Answer 1

5a)

• Cogs is a variable cost with respect to sales volume as it will increase with every increase in sales and vice-versa.

2 .

• Depreciation,office supplies, salaries,salaries, Rent are fixed cost as it will not change with increase or decrease in sales volume.

3 .

• Utilities can be considered as a mixed cost if it is required in the production and a portion will be fixed which will not be affected due to sales volume.

​​​​​​​1b)

• Income tax expense is payable on the profit of an entity. if the entity makes more profit or decrese in expenses then the income tax burden is more and if the entity incurs losses then it will not pay taxes on income.

​​​​​​​2e)

• Straight line method of depriciation is assumed here.

​​​​​​​7f)

• Budgeted income statement for 9,600 units

Sales -  9600*125	12,00,000
Cogs -  9600*7.25	69,600
Gross profit	11,30,400
Depreciation	29,520
Office supplies	2,200
Salaries	1,12,850
​​​​​​​Rent	18,000
Utilities	27,192
Operating income	9,40,638