Edwards & Shaw is a merchandising company that is the sole distributor of a prod
ID: 2431013 • Letter: E
Question
Edwards & Shaw is a merchandising company that is the sole distributor of a product that is increasing in popularity. The company’s income statement for the three most recent months is listed below.
Edwards and Shaw
Income Statement
For the Three Months Ending September
July
August
September
Sales in Units
4,500
5,000
6,000
Sales Revenue
$675,000
$750,000
$900,000
Cost of Goods Sold
275,000
300,000
350,000
Gross Margin
400,000
450,000
550,000
Operating Expenses:
Advertising Expense
11,000
11,000
11,000
Shipping Expense
27,000
30,000
36,000
Salaries and Commissions
127,500
135,000
150,000
Legal Expense
7,000
7,000
7,000
Depreciation Expense
10,000
10,000
10,000
Total Operating Expenses
182,500
193,000
214,000
Operating Income
$217,500
$257,000
$336,000
Edwards and Shaw expect to sell 6,500 units in October. Prepare an absorption income statement for October.
July
August
September
Sales in Units
4,500
5,000
6,000
Sales Revenue
$675,000
$750,000
$900,000
Cost of Goods Sold
275,000
300,000
350,000
Gross Margin
400,000
450,000
550,000
Operating Expenses:
Advertising Expense
11,000
11,000
11,000
Shipping Expense
27,000
30,000
36,000
Salaries and Commissions
127,500
135,000
150,000
Legal Expense
7,000
7,000
7,000
Depreciation Expense
10,000
10,000
10,000
Total Operating Expenses
182,500
193,000
214,000
Operating Income
$217,500
$257,000
$336,000
3. Edwards and Shaw expect to sell 6,500 units in October. Prepare an absorption income statement for October (assume we produce and sell the same number of units). Sales in Units 6,500 Sales Revenue Operating IncomeExplanation / Answer
3) Firstly we need to seperate the cost of goods sold into variable and fixed component which is shown as follows:-
Variable cost of goods sold per unit = (COGS August - COGS July)/(Units sold August - Units sold July)
= ($300,000 - $275,000)/(5,000 - 4,500)
= $25,000/500 = $50 per unit
Fixed COGS = COGS August - Variable COGS
= $300,000 - (5,000 units*$50) = $50,000
Sales price per unit = Sales Revenue August/Units sold
= $750,000/5,000 units = $150 per unit
Shipping expense per unit (as its is variable) = Shipping expense August/Units sold
= $30,000/5,000 units = $6 per unit
Advertising expense, Legal expense and depreciation expense are fixed costs and will remain same in October.
Variable salaries and commissions per unit = (Cost August - Cost July)/(Units August - Units July)
= ($135,000 - $127,500)/(5,000 - 4,500)
= $7,500/500 = $15 per unit
Fixed salaries and commissions = $135,000 - (5,000 units*$15) = $60,000
Edwards and Shaw
Absorption Income Statement
For the Month Ending October (Amounts in $)
Sales in units 6,500 Sales Revenue (6,500 units*$150) 975,000 Cost of Goods Sold [(6,500 units*$50)+$50,000] (375,000) Gross Margin (A) 600,000 Operating Expenses: Advertising Expense 11,000 Shipping Expense (6,500 units*$6) 39,000 Salaries and Commissions [(6,500 units*$15)+$60,000] 157,500 Legal Expense 7,000 Depreciation Expense 10,000 Total Operating Expenses (B) 224,500 Operating Income (A-B) 375,500Related Questions
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