Wilson's Market is reviewing a project with sales of 6,200 units plus or minus 2 percent at a...

Question:

Wilson's Market is reviewing a project with sales of 6,200 units plus or minus 2 percent at a sales price of $29 plus or minus 1 percent per unit. The expected variable cost per unit is $11 plus or minus 3 percent and the expected fixed costs are $87,000 plus or minus 1 percent. The depreciation expense is $68,000 and the tax rate is 35 percent. What is the net income under the worst-case scenario?

Income Statement:

The company performance can be measured by preparing the profit and loss statement. The revenues earned and expenses incurred during the fiscal period and the net profit or loss is calculated in the profit and loss statement.

Answer and Explanation:

In the worst-case scenario, the conservative approach is followed in which

  • The sales will be assumed at the lower estimate
  • The costs will be assumed at a higher estimate
  • The projected sales of 6,200 units will be estimated at 98% amounting to 6,076 units
  • The sales price of $29 per unit will be estimated at 99% amounting to $28.71/unit
  • The variable cost of $11 per unit will be estimated at 103% amounting to $11.33/unit
  • The fixed cost of $87,000 will be estimated at 101% amounting to $87,870
  • The depreciation expense is $68,000
  • The tax rate is 35%

Income Statement
Unit Rate per unit Total amount
Sales revenue 6,076 $28.71    $174,441.96
Less - Variable Cost 6,076 $11.33 $68,841.08
Contribution Margin $17.38 $105,600.88
Less - Fixed Cost $87,870.00
Depreciation $68,000.00
Net Income before Income Tax Expense -$50,269.12
Income Tax Expense $17,594.19
Net Income -$32,674.93

There will be a net loss of $32,674.93, under the worst-case scenario.


Learn more about this topic:

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How to Make an Income Statement: Example & Analysis

from Accounting 201: Intermediate Accounting I

Chapter 5 / Lesson 6
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