## (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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This question was answered on: Oct 15, 2019

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