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Case study on profit in business

 Case study on profit in business


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:

OpeningFirst MonthSecond Month
Balance SheetIncome StatementCash FlowBalance SheetIncome StatementCash FlowBalance Sheet
Accounts ReceivableDirect materials20,0000100,00040,0000180,000
Direct Labor30,000060,0000
Total Assets75,000AMachinery rent10,0000156,50010,0000258,000
Accounts Payable=Cost ofGoodsSold(60,000)060,000110,000(60,000)110,000
Owners’ Equity+Advertising3000(3,000)3000(3000)
Owners Capital75,000Office Rental4500(4500)75,0004500(4500)75,000
Retained EarningsInsurance1000(1000)21,5001000(1000)73,000
Total Owners Equity75,000OEOperating expenses(18,500)96,500-18,500148,000
Net Pre-tax Profit21,500(18,500)156,50015,50021,500258,000
Income StatementCash FlowBalance Sheet
Accounts ReceivableDirect materials80,0000240,000
Direct Labor80,0000
Total AssetsAMachinery rent15,0000369,500
Accounts Payable=Cost of Goods Sold175,000(110,000)
Owners’ Equity+Advertising3000(3000)
Owners CapitalOffice Rental4500(4500)75,000
Retained EarningsInsurance1000(1000)119,500
Total Owners EquityOEOperating expenses-18,500194,500
Net Pre-tax Profit46,50051,500369,500

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


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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