Whirly Corporation’s most recent income statement is shown below:

Whirly Corporation’s most recent income statement is shown below:

	Total		Per Unit
Sales (7,900 units)	$	244,900	$	31.00
Variable expenses		150,100		19.00
Contribution margin		94,800	$	12.00
Fixed expenses		55,000
Net operating income	$	39,800

Required:

Prepare a new contribution format income statement under each of the following conditions (consider each case independently):

1.	The sales volume increases by 40 units.

2. The sales volume decreases by 40 units.   3. The sales volume is 6,900 units. Explanation: 1. Sales (7,940 × $31.00) = $246,140 2. Sales (7,860 × $31.00) = $243,660 3. Sales (6,900 × $31.00) = $213,900

Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, Inc., to dispense frozen yogurt products under The Yogurt Place name. Mr. Swanson has assembled the following information relating to the franchise:

Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, Inc., to dispense frozen yogurt products under The Yogurt Place name. Mr. Swanson has assembled the following information relating to the franchise:

  

a.	A suitable location in a large shopping mall can be rented for $4,000 per month.
b.	Remodeling and necessary equipment would cost $348,000. The equipment would have a 20-year life and an $17,400 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation.
c.	Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $430,000 per year. Ingredients would cost 20% of sales.
d.	Operating costs would include $83,000 per year for salaries, $4,800 per year for insurance, and $40,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 14.0% of sales.

 

Required:

1.

Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet. Explanation: 1. Variable expenses: Cost of ingredients (20% × $430,000) = $86,000 Commissions (14.0% × $430,000) = $60,200   Selling and administrative expenses: Rent ($4,000 × 12) = $48,000   Depreciation: $348,000 – $17,400 = $330,600 $330,600 ÷ 20 years = $16,530 per year.   2a. The formula for the simple rate of return is:   Simple rate of return =  Annual incremental net operating income  Initial investment           = $91,470   = 26.3% $348,000   2b. Yes, the franchise would be acquired because it promises a rate of return in excess of 19%.   3a. The formula for the payback period is:   Payback period = Initial investment Annual net cash inflow           = $40,000   = 3.2 years $108,000*   *Net operating income + Depreciation = Annual net cash inflow $91,470 + $16,530 = $108,000   3b. According to the payback computation, the franchise would not be acquired. The 3.2 years payback is greater than the maximum 3 years allowed. Payback and simple rate of return can give conflicting signals as in this example.

Wheeler Corporation’s most recent income statement follows:

Wheeler Corporation’s most recent income statement follows:

	Total		Per Unit
Sales (8,000 units)	$	208,000	$	26.00
Variable expenses		144,000		18.00
Contribution margin		64,000	$	8.00
Fixed expenses		56,000
Net operating income	$	8,000

Required:

Prepare a new contribution format income statement under each of the following conditions (consider each case independently):

1.	The sales volume increases by 50 units. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

Contribution Income Statement
	Total
Sales	$ 209,300
Variable expenses	144,900
Contribution margin	64,400
Fixed expenses	56,000
Net operating income (loss)	$ 8,400

2.	The sales volume declines by 50 units. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

Contribution Income Statement
	Total
Sales	$ 206,700
Variable expenses	143,100
Contribution margin	63,600
Fixed expenses	56,000
Net operating income (loss)	$ 7,600

3.	The sales volume is 7,000 units. (Input all amounts as positive values except losses which should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

Contribution Income Statement
	Total
Sales	$ 182,000
Variable expenses	126,000
Contribution margin	56,000
Fixed expenses	56,000
Net operating income (loss)	$ 0

Wheeler Corporation’s most recent income statement follows:

Exercise 5-1 Preparing a Contribution Format Income Statement [LO1]

Wheeler Corporation’s most recent income statement follows:

	Total		Per Unit
Sales (8,000 units)	$	208,000	$	26.00
Variable expenses		144,000		18.00
Contribution margin		64,000	$	8.00
Fixed expenses		56,000
Net operating income	$	8,000

Required:

Prepare a new contribution format income statement under each of the following conditions (consider each case independently):

1.	The sales volume increases by 50 units. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

Contribution Income Statement
	Total
Sales	$ 209,300
Variable expenses	144,900
Contribution margin	64,400
Fixed expenses	56,000
Net operating income (loss)	$ 8,400

2.	The sales volume declines by 50 units. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

Contribution Income Statement
	Total
Sales	$ 206,700
Variable expenses	143,100
Contribution margin	63,600
Fixed expenses	56,000
Net operating income (loss)	$ 7,600

3.	The sales volume is 7,000 units. (Input all amounts as positive values except losses which should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

Contribution Income Statement
	Total
Sales	$ 182,000
Variable expenses	126,000
Contribution margin	56,000
Fixed expenses	56,000
Net operating income (loss)	$ 0