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(Solved) Preparation of an Income Statement for The Serious Reader Company


Preparation of an Income Statement for The Serious Reader Company
ACCOUNTING COST SYSTEMS AND COST BEHAVIOR

 

Case Assignment 1

 

Preparation of an Income Statement for The Serious

 

Reader Company

 

The first case of this course provides an opportunity to

 

prepare a segmented variable costing (contribution margin,

 

behavioral) income statement and analyze the information.

 

This is a very small company and the information may seem

 

simplistic at first glance. Don?t forget that numbers and

 

hands-on practice best illustrate many basic accounting

 

concepts.

 


 

The Serious Reader Company is a small online retailer operating out of a garage

 

apartment. The owner buys books at garage sales, thrift shops, library sales, and

 

whenever an opportunity arises. The company classifies all books into five

 

categories based on cost of acquisition and estimated sales price. See below for

 

details about books purchased and sold during the last year (201X).

 

Price Categories

 


 

A

 


 

B

 


 

C

 


 

D

 


 

E

 


 

Units Sold

 


 

2,000

 


 

1,000

 


 

500

 


 

400

 


 

400

 


 

Units Purchased

 


 

3,000

 


 

1,200

 


 

1,000

 


 

1,000

 


 

1,000

 


 

Resale Price

 


 

$4.00

 


 

$15.00

 


 

$25.00

 


 

$45.00

 


 

$40.00

 


 

Cost

 


 

$0.50

 


 

$5.00

 


 

$10.00

 


 

$20.00

 


 

$20.00

 


 

In addition to purchasing inventory (used books), the company incurs some

 

operating expenses.

 


 

Variable operating expenses

 

Shipping per book

 


 

$ 1.50

 


 

Fixed expenses

 

Internet-related costs

 


 

$5,000

 


 

Travel, etc.

 


 

2,000

 


 

Advertising

 


 

1,000

 


 

Other overhead

 


 

3,000

 


 

Required:

 

1. Computations (use Excel)

 


 


 


 


 


 


 

Prepare a segmented variable costing (behavioral) income statement

 

for the company in good format.

 

Prepare a second variable costing statement assuming 90% of all the

 

books in each category purchased were actually sold.

 

Prepare a third variable costing statement assuming that the price is

 

increased by 50% for all five categories (use original sales

 

information).

 

The owner enjoys the used-book business. Any suggestions as how

 

to turn this into a full-time business venture so the owner can quit

 

his other job? Prepare another income statement to support your

 

idea.

 


 

2. Memo (use Word)

 

Interpret the results from the computations and explain

 

how the information is useful. Write a four or five

 

paragraph memo to the owner of the business. Start

 

with an introduction and end with a recommendation.

 

Each of the four or five paragraphs should have a

 

heading.

 

Short essay to comment on the questions below (use

 

Word). Start with an introduction and end with a summary or

 

conclusion. Use headings. Maximum length of two pages.

 


 


 


 


 

Why do many organizations make the effort to prepare a different

 

type of income statement for internal purposes?

 

Variable costing is not just about preparing income statements.

 

Provide at least three scenarios in which understanding how costs

 

behave is useful.

 


 

Assignment Expectations

 

Each submission should include two files: (1) An Excel file;

 

and (2) A Word document. The Word document shows

 

the memo first and short essay last. Assume

 

a knowledgeable business audience and use required

 

format and length. Individuals in business are busy and want

 

information presented in an organized and concise manner.

 


 

 


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DATE ANSWERED

Oct 15, 2019

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