Question

Diversified Industries manufactures sump-pumps. Its most popular product is called the Super Soaker, which has a retail price of $1,200 and costs $540 to manufacture. It sells the Super Soaker on a standalone basis directly to businesses. Diversified also provides installation services for these commercial customers, who want an emergency pumping capability (with regular and back-up generator power) at their businesses. Diversified also distributes the Super Soaker through a consignment agreement with Menards. Income data for the first quarter of 2017 from operations other than the Super Soaker are as follows. Revenues $9,500,000 Expenses ?7,750,000 Diversified has the following information related to two Super Soaker revenue arrangements during the first quarter of 2017. 1.Diversified sells 30 Super Soakers to businesses in flood-prone areas for a total contract price of $54,600. In addition to the pumps, Diversified also provides installation (at a cost of $150 per pump). On a standalone basis, the fair value of this service is $200 per unit installed. The contract payment also includes a $10 per month service plan for the pumps for 3 years after installation (Diversified's cost to provide this service is $7 per month). The Super Soakers are delivered and installed on March 1, 2017, and full payment is made to Diversified. Any discount is applied to the pump/installation bundle. 2.Diversified ships 300 Super Soakers to Menards on consignment. By March 31, 2017, Menards has sold two-thirds of the consigned merchandise at the listed price of $1,200 per unit. Menards notifies Diversified of the sales, retains a 5% commission, and remits the cash due Diversified.

Accounting:Determine Diversified Industries' 2017 first-quarter net income. (Ignore taxes.)

Analysis: Determine free cash flow for Diversified Industries for the first quarter of 2017. In the first quarter, Diversified had depreciation expense of $175,000 and a net increase in working capital (change in accounts receivable and accounts payable) of $250,000. In the first quarter, capital expenditures were $500,000; Diversified paid dividends of $120,000.

Answer 1

Net income for the first Quarter = $1,493,340.

Working:

Revenue from other products	9500000
Revenue from Super Soaker	54600
Consignment Sales Revenue (200*1200)	240000
Total Revenue (A)	9554600
Expenses:
Expenses for other products	7750000
Expenses for asuper Soaker (942*30) *	28260
Cost of consignment sales (200*540)	108000
Depreciation Expense	175000
Total Expenses    (B)	8061260
Net income (A - B)	1493340

Number of units sold	30
Sale value	54600
Price per unit	1820
Stand alone price	1200
Fair value of Installation per unit	200
Service plan charge for three year ($10 per month)	360
total	1760
Allocation of the price of $1,820
Sale price of the unit (1820/1760)*1200	1241
Installation revenue (1820/1760)*200	207
Service Plan Revenue (1820/1760)*360	372
	1820
Cost for the above activities
Unit cost price	540
Cost of the installation	150
Cost for the service plan (7*12*3)	252
Total Cost   *	942

Free Cash flow
Net income	1493340
Add: Depreciation Expense	175000
Less: Increase in working Capital	-250000
Net cash flow from operating activities	1418340
Les: Capital Expenses	-500000
Free cash flows	918340