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Sales (17,000 @ $60) $1,020,000
Cost of goods sold 612,000
Gross profit $ 408,000
Selling and administrative expenses 66,000
Income from operations $ 342,000
Additional Information:
Cost Total Cost Number of Units Unit Cost
Manufacturing costs:
Variable $442,000 17,000 $26
Fixed 170,000 17,000 10
Total $612,000 $36
Selling and administrative expenses:
Variable ($2 per unit sold) $34,000
Fixed 32,000
Total $66,000
Required: Prepare a new income statement for the year using variable
costing. Comment on the differences, if any, between the absorption
costing and the variable costing income statements. (Points : 30)
Question 2.2. (TCO I) (Ignore income taxes in this problem.) Simpson
Beauty Products Corporation is considering the production of a new
conditioning shampoo that will require the purchase of new mixing
machinery. The machinery will cost $700,000, is expected to have a
useful life of 10 years, and is expected to have a salvage value of
$70,000 at the end of 10 years. The machinery will also need a $45,000
overhaul at the end of Year 5. A $60,000 increase in working capital will
be needed for this investment project. The working capital will be
released at the end of the 10 years. The new shampoo is expected to
generate net cash inflows of $150,000 per year for each of the 10 years.
Simpson's discount rate is 18%.
Items Year(s) Amount 18% Factor Present Value
Cost of machinery Now ($700,000) 1 ($700,000)
Working capital increase Now ($60,000) 1 ($60,000)
Annual cash inflows 1–10 $150,000 4.494 674,100
Overhaul 5 ($45,000) 0.437 ($19,665)