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

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