Bayside Purses produces and sells wallets to retailers in the Bay area. The company is family-owned and wishes to expand their business to include stores from Bay St. Louis, MS, to Pensacola, Fl. The owners have made contact with a potential investor and have provided their most recent monthly operating income statement to him. The investor, John Doyle, does not have an accounting background and has asked you, as his accountant, to evaluate and explain Bayside's cost structure to him.
In order to evaluate the company and to illustrate the cost structure to your client, you will calculate the following items:
1. Redo the income statement provided by Bayside Purses into a contribution margin income statement.
2. Calculate the contribution margin percentage and breakeven point in units and revenues for August 2014.
3. Calculate the margin of safety in units and revenues for August 2014.
4. If sales in August are 8,500 and Bayside's tax rate is 30%, calculate its net income.
5. Write a memo to your client, Mr. Doyle, explaining what each of the items in Items 1-4 mean in terms that someone without accounting knowledge would understand. See the syllabus for help in developing your memo. (You can be creative with the "stationary" that your firm uses, just make sure that it looks professional.)