Question 1 - Jacob Davis recently graduated from medical school. He is considering opening his own family practice doctor office. A doctor's office is a high-fixed cost business, as it requires considerable expenditures for facilities, labor, and equipment, no matter how many families are served. Assume the annual fixed cost of operations is $400,000. Further assume that the only significant variable cost relates to patients served. An average patient served costs $250. Jacob's banker has asked a variety of questions in contemplation of providing a loan for this business.
Requirements:
a. If the average family is charged $475 for services, how many families must be served to clear the break-even point?
b. If the banker believes Jacob will only serve 1,000 families during the first year in business, how much will the business lose during its first year of operation?
c. If Jacob believes his profits will be at least $100,000 during the first year, how much is he anticipating for total revenue?
d. The banker has suggested that Jacob can reduce his fixed costs by $100,000 if he will not purchase certain equipment. Jacob can instead lease or rent this equipment as needed. The variable cost of leasing this equipment is $55 per family served. Will this suggestion help Jacob reach the break-even point sooner?
Question 2 - Carpet Clean manufactures a chemical cleaner. The company was formed during the current year. As a result, there was no beginning inventory. Management is evaluating performance and inventory management issues, and desires to know both net income and ending inventory under generally accepted accounting principles (absorption costing) as well as variable costing methods. Relevant facts are as follows:
Selling price per gallon $11.00
Variable manufacturing cost per gallon $2.00
Variable SG&A costs per gallon $2.25
Fixed manufacturing costs $2,900,000
Fixed SG&A $470,000
Total gallons produced 1,625,000
Total gallons sold 1,500,000
Requirement: Prepare income statements based on the absorption costing and variable costing methods.