Case study on profit in business
Revenues
First Month of Operations: 10,000 units sold at $10 per unit.
Second Month of Operations: 20,000 units sold. The first 10,000 at $10 per unit, and the second 10,000 at $8 per unit.
ThirdMonth of Operations: 40,000units sold at $6 per unit.
Cash Flow characteristics: Goods are shipped at the end of the month are paid to the Company atthe end of the following month by the customer.
Cost of Goods Soldis made up of three components:
?Direct Materials – -$2 per unit
?Direct Labor—$3per unit, renegotiated to $2 in the third month with new pricing
?Fixed Machinery andMfg.machinery and space rental costs—$10,000 per month, $15,000 with new labor price in month 3
?Cash flow characteristics: Mfg. is outsourced to a different organization and all costs are paidthe next month followingthe month they are produced – i.e. paid thenext monthafter the monththey are received.
OperatingExpenses: the remainder of the company’s expenses includes the following:
Salaries for office staff and the Owner are fixedat $120,000per year or $10,000 per month. $50,000 of the total goes to the owner
Advertising is a fixed rate contract with an internet services firm which provides the company with secure servers, web analytics and Search Engine Optimization services for $3000 per month.
Office Rental is a fixed yearly rental contract for the administrative offices which costs the company $4500 per month.
Insurance is a fixed rate contract for insurance on the plant property and equipment is $1000 per month.
Cash flow characteristics: All operating expenses are paid during the month that they are incurred.
Ownership and Taxation: The Company is owned by a single individual who is paid a salary of $50,000 per year. The following tax rates are in affect for the purposes of calculating tax on taxable income:
Corporate Tax Rate: 30%
Individual Tax Rate: 40%
Dividend Tax Rate: 15%
Appendix Continued:
| Opening | First Month | Second Month | |||||||
| Balance Sheet | Income Statement | Cash Flow | Balance Sheet | Income Statement | Cash Flow | Balance Sheet | |||
| Cash | 75,000 | Revenues | 100,000 | 0 | 56,500 | 180000 | 100,000 | 78,000 | |
| Accounts Receivable | Direct materials | 20,000 | 0 | 100,000 | 40,000 | 0 | 180,000 | ||
| Direct Labor | 30,000 | 0 | 60,000 | 0 | |||||
| Total Assets | 75,000 | A | Machinery rent | 10,000 | 0 | 156,500 | 10,000 | 0 | 258,000 |
| Accounts Payable | = | Cost ofGoodsSold | (60,000) | 0 | 60,000 | 110,000 | (60,000) | 110,000 | |
| L | Salary | 10,000 | (10,000) | 10,000 | (10,000) | ||||
| Owners’ Equity | + | Advertising | 3000 | (3,000) | 3000 | (3000) | |||
| Owners Capital | 75,000 | Office Rental | 4500 | (4500) | 75,000 | 4500 | (4500) | 75,000 | |
| Retained Earnings | Insurance | 1000 | (1000) | 21,500 | 1000 | (1000) | 73,000 | ||
| Total Owners Equity | 75,000 | OE | Operating expenses | (18,500) | 96,500 | -18,500 | 148,000 | ||
| Net Pre-tax Profit | 21,500 | (18,500) | 156,500 | 15,500 | 21,500 | 258,000 |
| ThirdMonth | |||||
| Income Statement | Cash Flow | Balance Sheet | |||
| Cash | Revenues | 240,000 | 180,000 | 129,500 | |
| Accounts Receivable | Direct materials | 80,000 | 0 | 240,000 | |
| Direct Labor | 80,000 | 0 | |||
| Total Assets | A | Machinery rent | 15,000 | 0 | 369,500 |
| Accounts Payable | = | Cost of Goods Sold | 175,000 | (110,000) | |
| L | Salary | 10,000 | (10,000) | 175,000 | |
| Owners’ Equity | + | Advertising | 3000 | (3000) | |
| Owners Capital | Office Rental | 4500 | (4500) | 75,000 | |
| Retained Earnings | Insurance | 1000 | (1000) | 119,500 | |
| Total Owners Equity | OE | Operating expenses | -18,500 | 194,500 | |
| Net Pre-tax Profit | 46,500 | 51,500 | 369,500 |
Calculate for the Third Month:
?Current Assets $369,500
?Current Liabilities $175,000
?Current Ratio2.11
?Owners’ Equity$194,500
Cost of Goods Sold $175,000
Gross Profit Margin65,000
Calculate Breakeven the first month at a sales price of $10 per unit: answer is 5700 units 28,500/5 = 5700
Breakeven
Income Statement
Revenues?? 57,000
?Direct Materials 11,400
?Direct Labor 17,100
?Machinery Rent 10,000
Cost of Goods Sold 38,500
? Salary?? 10,000
? Advertising?? 3000
? Office Rental? 4500
? Insurance?? 1000
?Operating Expenses? 18,500
?Net Pre-tax Profit? 0
Complete the ratios indicated on the worksheet and calculate for the first month – how much profit wouldGlak Love make if it sold 5710 units during its first month of operations.
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