UDGET ASSUMPTIONS FOR THE COMING YEAR: 1. Before the business begins, you will t
ID: 2584175 • Letter: U
Question
UDGET ASSUMPTIONS FOR THE COMING YEAR: 1. Before the business begins, you will take S5,000 cash from your savings account to invest in the business. You will protect yourself by organizing as a corporation, with yourself as the only stockholder 2. Before the business begins, it will buy a computer, printer, and software package that together cost $5,200. Your parents have agreed to lend the business $5,200 cash so that the business can pay for the equipment and software. The business plans to repay your parents on January 31, 2018. Your parents do not expect any interest but require you to sign a promissory note The beginning balance sheet for your business is presented on the following page rachne, Inc Balance Sheet January 1, 2017 Assets Current Assets Cash $5,000 Long-term Assets Equipment Less Accumulated Depreciation 5,200 0 5,200 Total Assets Liabilities and Stockholder's Equit S0 Current Liabilities Long-term Liabilities 5,200 $5,200 Note Pavable Total Liabilities Stockholder's Equity Common Stock Retained Earnings $5,000 0 5,000 Total Liabilities Total Liabilities and Stockholder's Equit 3. Starting January 1, 2017, the business will charge $40 per hour for design work and bill clients as each job is completed. You expect that by December 31, 2017, the end of the fiscal year, 70% of clients will have paid the business in cash. You expect that the rest will pay by January 31, 2018 4. The business will hire an assistant to help with general office work. The assistant will earn $15 per hour and will work exactly the same hours that you work. The assistant will be paid for each month's work on the fifth day of the month following the month when the work is done. For the sake of simplicity, treat the assistant as an independent contractor rather than an employee. This means that you do not have to worry about withholding or matching payroll taxes. Assume that hours worked in (round to nearest whole hour) of the total hours for the year 2017 are expected to total 10% 5. The business will purchase office supplies for cash of $1,800 in lanuary 2017 6. On March 1, the business will pay cash of $1,500 for a one-year liability insurance policy.Explanation / Answer
Arachne, Inc.
Budgeted Income Statement
For the year ended December 31, 2017
Hours Worked
907 hours
Per hour
Total
Revenue
40
$ 36,280
Variable Expenses
Wages
15
$ 13,605
Total Variable Expenses
$ 19,605
Contribution Margin
$ 16,675
Fixed Expenses
Supplies
$ 1,800
Advertisement Expense
$ 6,000
Insurance Policy
$ 1,500
Dividend
$ 2,500
Total Fixed Expenses
$ 11,800
Operatig Income
$ 4,875
1. Break Even
Fixed Expenses
$ 11,800
Contribution Margin
35
Break even Hours
337
2. Margin of Safety in Hours
Break Even Sales
337
Projected Sales
907
Margin of Safety
570
3. Increase in Total Contribution Margin if hours worked increase by 10%
Hours Worked
907
Increase by 10%
998
Sales
40
$ 39,908
Variable Expenses
Wages
15
$ 14,970
Total Variable Expenses
$ 14,970
Contribution Margin
$ 24,938
Contribution Margin before
$ 16,675
Increase in Contribution Margin
49.55%
5. Increase in Operating Income if hours worked increase by 10%
Contribution Margin
$ 24,938
Fixed Expenses
Supplies
$ 1,800
Advertisement Expense
$ 6,000
Insurance Policy
$ 1,500
Dividend
$ 2,500
Total Fixed Expenses
$ 11,800
Operatig Income
$ 13,138
Operatig Income before
$ 4,875
Increase in Operating Income
169.50%
Arachne, Inc.
Budgeted Income Statement
For the year ended December 31, 2017
Hours Worked
907 hours
Per hour
Total
Revenue
40
$ 36,280
Variable Expenses
Wages
15
$ 13,605
Total Variable Expenses
$ 19,605
Contribution Margin
$ 16,675
Fixed Expenses
Supplies
$ 1,800
Advertisement Expense
$ 6,000
Insurance Policy
$ 1,500
Dividend
$ 2,500
Total Fixed Expenses
$ 11,800
Operatig Income
$ 4,875
1. Break Even
Fixed Expenses
$ 11,800
Contribution Margin
35
Break even Hours
337
2. Margin of Safety in Hours
Break Even Sales
337
Projected Sales
907
Margin of Safety
570
3. Increase in Total Contribution Margin if hours worked increase by 10%
Hours Worked
907
Increase by 10%
998
Sales
40
$ 39,908
Variable Expenses
Wages
15
$ 14,970
Total Variable Expenses
$ 14,970
Contribution Margin
$ 24,938
Contribution Margin before
$ 16,675
Increase in Contribution Margin
49.55%
5. Increase in Operating Income if hours worked increase by 10%
Contribution Margin
$ 24,938
Fixed Expenses
Supplies
$ 1,800
Advertisement Expense
$ 6,000
Insurance Policy
$ 1,500
Dividend
$ 2,500
Total Fixed Expenses
$ 11,800
Operatig Income
$ 13,138
Operatig Income before
$ 4,875
Increase in Operating Income
169.50%
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