Andre\'s Photo Store, a manufacturing firm, started operations on January 1, 200
ID: 2435816 • Letter: A
Question
Andre's Photo Store, a manufacturing firm, started operations on January 1, 2008. On that date, the only assets were cash of $10,000, and inventory of $2,250 (1,500 direct material kits). They produce only one item, a disposable camera that sells for $10. Variable costs of production are $4, consisting of a direct material kit that costs $1.50, $2 in direct labor, and $0.50 per unit in variable overhead. Other expenses include $2 per camera in variable selling expense, $10,000 per month in fixed production cost, and $6,000 per month in fixed selling and administration.Sales are collected 60% in the month of sales and 40% in the next month.
All expenses are paid in the month they are incurred except material (kit) purchases which are paid in the month following purchase.
Material inventory is equal to 30% of the next months production requirements.
Cameras are made when ordered so there is no finished goods inventory.
Sales in units are forecasted as follows:
January 5,000
February 6,000
March 7,000
Reference: Ref 10-3
What is the expected net income using the contribution format for February?
Explanation / Answer
What is the expected net income using the contribution format for February?
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Sales Revenue 6,000 X $10 $60,000
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Less : Variable costs
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Opening Inventory 1,500 x 1.50 $2,250
Direct material kit 4,500 x $1.50 $6,750
Ending Inventory 7,000x30%x1.50 $3,150
Total Direct materials purchased $12,150
Less : Ending Inventory 7,000x30%x1.50 $3,150
Direct materials consumed $9,000
Direct labor 6,000 x $2.00 $12,000
Production overhead 6,000 x $0.50 $3,000
Selling expense 6,000 x $2.00 $12,000
Total variable costs $36,000
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Contribution Margin $24,000
Less : Fixed costs
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Production cost $10,000
Selling & administration $6,000 $16,000
Net Income $8,000
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