1589 words - 7 pages

Semester Project

Income Statement Analysis of Regional Distribution, INC.

Date Submitted: 11/30/2012

Submitted by:

Jingwen Tang 103802116

Shiya Wang 103801968

Xinyue Zhang 103683797

Hongyang Xu 103667508

Mathew Nigel

Contents

I. Introduction……………………………………………………….2

II. Analysis…………………………………………………..……….2

a. Determine Regional Distribution’s break-even point in sales dollars…………...………………………………….…………..2

b. What dollar sales volume is required to earn an after-tax profit of $480,000? ……...…….………………………..…………….2

c. Assuming budgeted 2012 sales of $6,000,000, prepare a 2012 contribution income statement. ………………..………………3

d. Discuss the ...view middle of the document...

Third, fixed costs in 2010 is 330,000 ( $250,000 + $80,000).

Finally, with a 0.18 of contribution margin ratio and fix costs of $330,000,DRD’s break-even point in sales dollars is 1833.333 ($330,000/0.18)

b. What dollar sales volume is required to earn an after-tax profit of $480,000?

Target dollar sales volume = (Fixed costs + Desired profit)/ Contribution margin ratio.

First, total fixed costs include two items in the problem—depreciation and administrative, so the total fixed costs are 80,000+250,000=330,000.

Second, according to before-tax profit= after-tax profit / (1-tax rate), so the before-tax profit = 480,000/ (1-0.4) = 800,000. Desired profit = Before-tax profit.

Third, according to the required a, Contribution margin ratio is 0.18.

At last, according to Target dollar sales volume = (Fixed costs + Desired profit)/ Contribution margin ratio, the answer is: Target dollar sales volume = (330,000+800,000)/ 0.18= 6,277,777.78.

c. Assuming budgeted 2012 sales of $6,000,000, prepare a 2012 contribution income statement.

First, variable cost= sales *(1-contribution margin ratio). According to the required a, contribution margin ratio is 0.18, then variable cost is 6,000,000 *(1-0.18) = 4,920,000.

Second, according to sales- variable cost= contribution margin. We can get the contribution margin is 6,000,000-4,920,000=1,080,000.

Third, total fixed costs include two items in the problem—depreciation and administrative, so the total fixed costs are 80,000+250,000=330,000.

Forth, Before-tax profit is defined by contribution margin- fixed costs. Then before-tax profit is 1,080,000- 330,000= 750,000.

Fifth, the problem said the tax rate is 40%. The income taxes = before-tax profit * tax rate= 750,000 * 40%= 300,000.

At last, according to after-tax profit= before-tax profit- income taxes, we can get the conclusion of after-tax profit—750,000-300,000=450,000.

Above all, the contribution income statement of Regional Distribution, INC in 2012 is as follows.

d. Discuss the reliability of the calculations in requirements a-c, including the limitations of the CVP model and how they affect the reliability of the model.

Analysis provides managers the breakeven point which can help managers project how future spending and production will contribute to the success or failure of the company. Because CVP analysis is based on statistical models, decisions can be broken down into probabilities that help with the decision-making process.

The CVP approach to analysis is beneficial, but it is limited in the amount of information.

1. The analysis assumes a linear revenue function and a linear cost function.

Based on the calculation of a, b and c. the CVP model is as follows.

Total revenues and total costs

Total cost

Total revenue

Variable cost

Fixed cost

Unit sales

In the model, the variable cost of one unit is a straight line.

However, an economic model shows a nonlinear relationship between cost and activity with each incremental unit of activity...

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