Question 1) Brazen, Inc. produces sound amplifiers for electric guitars. The firm's income statement showed the following:
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Revenue (8,400 units)
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$504,000
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100%
|
|
Variable expenses
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(302,400)
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60%
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Contribution margin
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$201,600
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40%
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Fixed expenses
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(140,400)
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|
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Operating income
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$61,200
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An automated machine has been developed that can produce several components of the amplifiers. If the machine is purchased, fixed expenses will increase to $315,000 per year. The firm's production capacity will increase, which is expected to result in a 25 percent increase in sales volume. It is also estimated that the variable expense ratio will be reduced to half of what it is now.
REQUIRED: (You must show all your work otherwise no credit will be given)
(a) Calculate the firm's current contribution margin per unit and break-even point in units.
(b) Calculate the firm's contribution margin per unit and break-even point in terms of units if the new machine is purchased.
(c) Calculate the firm's operating income assuming that the new machine is purchased.
(d) Do you believe that management of Brazen, Inc. should purchase the new machine? Explain your answer.
Question 2) Complete the Income Statement and Balance Sheet for Garnet Corporation using financial ratios:
Financial Ratios for the year are as follows:
Current Ratio.................................. 1.9 to 1
Acid-Test Ratio................................1.3 to 1
Debt/Equity Ratio..............................2.0 to 1
Inventory Turnover............................4.0 times
Accounts Receivable Turnover...............6.8 times
Times Interest Earned..........................4.45 times
Gross Profit Ratio...............................40%
Return on Investment...........................12%
Earnings per Share...............................$5.52
Additional Information:
1) All sales were made on account. Cash collections during the year exceeded sales by $14,000.
No uncollectible accounts were written off.
2) The accounts receivable balance at January 1, 2009 was $57,000.
3) No common stock was issued during the year.
4) Cash dividends declared and paid during the year totaled $7,600
5) The balance of the inventory account as of January 1, 2009 was $48,000.
6) Interest expense on the income statement relates to the 15% bonds payable; $10,000 of these bonds were issued on May 1, 2009. The remaining amount of bonds payable were outstanding throughout the year. All bonds were issued at face value.
REQUIRED: (You must show all your work or no credit will be given)
Complete the balance sheet and income statement.