Problem 10-1 (Part Level Submission)
The results of operations for the Preston Manufacturing Company for the fourth quarter of 2014 were as follows:
Sales
$520,000
Less variable cost of sales
312,000
Contribution margin
208,000
Less fixed production costs
$104,000
Less fixed selling and administrative expenses
52,000156,000
Income before taxes
52,000
Less taxes on income
20,800
Net income
$31,200
Note: Preston Manufacturing uses the variable costing method. Thus, only variable production costs are included in inventory and cost of goods sold. Fixed production costs are charged to expense in the period incurred.
The company’s balance sheet as of the end of the fourth quarter of 2014 was as follows:
Assets:
Cash
$185,000
Accounts receivable
260,000
Inventory
362,000
Total current assets
807,000
Property, plant, and equipment
450,000
Less accumulated depreciation
132,000
Total assets
$1,125,000
Liabilities and owners’ equity:
Accounts payable
$74,880
Common stock
533,000
Retained earnings
517,120
Total liabilities and owners’ equity$1,125,000
Additional information:
1.Sales and variable costs of sales are expected to increase by 10 percent in the next quarter.
2.All sales are on credit with 50 percent collected in the quarter of sale and 50 percent collected in the following quarter.
3.Variable cost of sales consists of 40 percent materials, 40 percent direct labor, and 20 percent variable overhead. Materials are purchased on credit. 40 percent are paid for in the quarter of purchase, and the remaining amount is paid for in the quarter after purchase. The inventory balance is not expected to change. Also, direct labor and variable overhead costs are paid in the quarter the expenses are incurred.
4.Fixed production costs (other than $8,000 of depreciation expense) are expected to increase by 1 percent. Fixed production costs requiring payment are paid in the quarter they are incurred.
5.Fixed selling and administrative costs (other than $9,000 of depreciation expense) are expected to increase by 2 percent. Fixed selling and administrative costs requiring payment are paid in the quarter they are incurred.
6.The tax rate is expected to be 40 percent. All taxes are paid in the quarter they are incurred.
7.No purchases of property, plant, or equipment are expected in the first quarter of 2015.
