Avatar Corp. has been the wholesale distributor of auto parts for domestic cars for 20 years. The company has suffered through the recent slump in the domestic auto industry, and its performance has not rebounded to the levels of the industry as a whole. The income statement for the year ended November 30, 2019 is also as follows (in thousands): Avatar Corp. Income Statement For the year ended, November 30, 2019 Net Sales 8,400 Cost and Expenses Cost of good sold 6,300 Marketing expenses 780 Administrative expense 900 Interest Expense 140 Total Expenses 8,120 Income before tax 280 Provision for income tax 112 Net income 168 The management team is considering the following actions for fiscal year 2020, which they expect, will improve profitability and result in a 5% increase in unit sales. a. Increase sales price 10% b. Increase advertising by P420,000 and hold all other marketing and administrative expenses at fiscal 2019 levels c. Improve customer service by increasing average current assets (inventory and accounts receivable) by a total of P300,000 and hold all other assets at fiscal 2019 levels d. Finance the additional asset and an annual interest rate of 10% and hold all other interest expense at fiscal year 2019 levels e. Improve the quality of products carried; this will increase the unit cost of goods sold by 4% f. Income tax rate is expected to be 40%, the same as in 2019 INSTRUCTIONS: Prepare budgeted income statement for 2020, assuming the plans would be carried out and 5% inrease in unit sales would be realized.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Avatar Corp. has been the wholesale distributor of auto parts for domestic cars for 20 years. The company has suffered through the recent slump in the domestic auto industry, and its performance has not rebounded to the levels of the industry as a whole. The income statement for the year ended November 30, 2019 is also as follows (in thousands):
Avatar Corp.
Income Statement
For the year ended, November 30, 2019
Net Sales 8,400
Cost and Expenses
Cost of good sold 6,300
Marketing expenses 780
Administrative expense 900
Interest Expense 140
Total Expenses 8,120
Income before tax 280
Provision for income tax 112
Net income 168
The management team is considering the following actions for fiscal year 2020, which they expect, will improve profitability and result in a 5% increase in unit sales.
a. Increase sales price 10%
b. Increase advertising by P420,000 and hold all other marketing and administrative expenses at fiscal 2019 levels
c. Improve customer service by increasing average current assets (inventory and accounts receivable) by a total of P300,000 and hold all other assets at fiscal 2019 levels
d. Finance the additional asset and an annual interest rate of 10% and hold all other interest expense at fiscal year 2019 levels
e. Improve the quality of products carried; this will increase the unit cost of goods sold by 4%
f. Income tax rate is expected to be 40%, the same as in 2019
INSTRUCTIONS: Prepare
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