CASE 5-2 RAINRULER STAINS ILO 1, 2] stains that the company produced and sold 31

Question

CASE 5-2 RAINRULER STAINS ILO 1, 2] stains that the company produced and sold 310,000 gallons of stain. There Incremental proft was no beginning inventory. Income for the year was as follows: Rain Ruler Stains produces a variety of exterior wood Gross profit per dollar of sales that have excellent coverage and longevity. In 2017, ($1350,000 $4.650,000) 0.2903 $243,852 Since the incremental profit was more than two times as large as current net income, most of the managers present at the meeting expressed their hearty congratulations. Jennifer Jones, a sum mer intern and assistant to the company controller, Ed Flem- ming, thought Reggie's estimate was more than a little rough. After the meeting, she approached her boss and expressed her 1,350,000 misgivings. "Ed, according to our previous discussions, fixed production costs related to rent, depreciation, and other items are about $1,362,500 per year. Reggie's analysis assumes that RainRuler Stains Income Statement For the Year Ended December 31, 2017 Sales Less cost of goods sold Gross profit Less selling and administrative expenses: 3,300,000 Selling expense $870,000 Administrative expense360,0001230,000 tre arent any fixed manufacturing overhead lems. And I know our shipping costs, which are included in selling expense, -are around S0.70 pergallon. Reggie's analysis assumesall sell. Net income $ 120,000 In the past, the company has marketed its product only to indepen- ing expense is fixed. It's probably the case that almost all of our dent hardware stores in Oregon, Washington, and Idaho. Recently, administrative expense is fixed, but that's clearly not accurate however, Reggie Sherman, VP of marketing, has negotiated deals for selling expense. How about if I recast our income statement in a contribution margin format-you know, using variable that as a basis to estimate the Impact of the with several large construction companies. He estimates that these deals will increase annual sales by 70,000 gallons but at a reduced costing-and use price of $12 per gallon. (The price in 2017 to hardware stores was new channel sales?" Ed quickly agreed to Jennifers proposal. $15 per gallon, and this will not be affected by the new deals.) team, Reggie presented a rough estimate of the financial impactREQUIRED of selling through the new channel: Additional sales (gallons) Selling price per gallon Incremental revenue At a recent meeting of the company's senior management 70,000 12.00 Assume the role of Jennifer and prepare an income statement for 2017 using variable costing. Then use information on that state ment as a basis for estimating the annual impact on profit of sales $ $840,000to construction companies

Explanation / Answer

RainRuler Stains Income Statement - Variable Costing Format For the year ended December 31, 2017 Activity - gallons 310000 Per unit Total Sales 15 4650000 Less: Variable Cost     Cost of goods sold * 6.25 1937500     Selling Expenses 0.70 217000 Total variable expenses 6.95 2154500 Contribution Margin 2495500 Less: Fixed Expenses    Cost of goods sold 1362500    Selling Expenses ** 653000    Administrative expenses 360000 Total Fixed Expenses 2375500 Net Income 120000 Working: Cost of goods sold Total 3300000 Less: Fixed element 1362500 Variable element 1937500 Variable element per unit * 6.25 Selling Expenses Total 870000 Variable element (310,000 x 0.70) 217000 Fixed Element ** 653000 RainRuler Stains Estimated Income Statement - Variable Costing Format For the year ended December 31, 2018 Current Additional Total Activity - gallons 310000 70000 380000 Per unit Total Per unit Total Sales 15.00 4650000 12.00 840000 5490000 Less: Variable Cost     Cost of goods sold * 6.25 1937500 6.25 437500 2375000     Selling Expenses 0.70 217000 0.70 49000 266000 Total variable expenses 6.95 2154500 6.95 486500 2641000 Contribution Margin 2495500 353500 2849000 Less: Fixed Expenses    Cost of goods sold 1362500    Selling Expenses ** 653000    Administrative expenses 360000 Total Fixed Expenses 2375500 Net Income 2495500 353500 473500 Current Net Income 120000 Incremental Profit 353500 The actual increase in net income is almost double the amount that Reggie has presented ,since the fixed cost element will have to be removed from the increased sales.

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