Question

Musco Lighting manufactures emergency power equipment. Its most popular generator is a model called the MegaGenerator 2.0, which has a retail price of $1,500 and costs Musco $740 to manufacture. It sells the MegaGenerator 2.0 on a standalone basis directly to businesses, as well as provides installation services. Musco also distributes the MegaGenerator 2.0 through a consignment agreement with Home Depot.

Musco has the following information related to four MegaGenerator 2.0 revenue arrangements during the first quarter of 2017.

1. Musco entered into an arrangement with the Piggly Wiggly grocery store chain in eastern Minnesota to deliver MegaGenerator 2.0s for the meat lockers in the grocers’ stores. Musco provides a 5% volume discount for MegaGenerator 2.0s purchased by Piggly Wiggly if at least $450,000 of MegaGenerator 2.0s are purchased during 2017. By March 31, 2017, Musco has made sales of $360,000 ($1,500 × 240 generators) to Piggly Wiggly. Based on prior experience with this promotion in two neighboring states, the discount threshold is met for the year if more than one-half of the target had been met by mid-year.

2. On January 1, 2017, Musco sells 20 MegaGenerator 2.0s to Washington D.C. Nick’s signs a 6-month note due in 6 months at an annual interest rate of 12%. Musco allows Nick’s to return any MegaGenerator 2.0s that it cannot use within 120 days and receive a full refund. Based on prior experience, Musco estimates that three units will be returned (using the most likely outcome approach). Musco‘s costs to recover the products will be immaterial, and the returned generators are expected to be resold at a profit. No MegaGenerator 2.0s have been returned as of March 31, 2017, and Musco still estimates that three units will be returned in the future.

3. Musco sells 30 MegaGenerator 2.0s to a hospital in the Florida Keys for a total contract price of $50,000. In addition to the MegaGenerator 2.0s, Musco also provides installation at a standalone selling price of $200 per MegaGenerator 2.0; the cost to Musco to install is $150 per MegaGenerator 2.0. The MegaGenerator 2.0s are delivered and installed on March 1, 2017, and full payment is made to Musco.

4. Musco ships 300 MegaGenerator 2.0s to Home Depot on consignment. By March 31, 2017, Home Depot has sold three-fourths of the consigned merchandise at the listed price of $1,500 per unit. Home Depot notifies Musco of the sales, retains an 8% commission, and remits the cash due to Musco.

Determine net income for Musco Industries for the first quarter of 2017. You can ignore taxes.

Hint: Determine the net income amount for each individual arrangement above and then add the four together. Each scenario is worth 5 points. Show your work so you can earn partial credit.

Answer 1

1 1 Sales to piggy wiggy grocery store 3 Sales to hospital in the Florida Retail price of mega generator Cost of mega generator Amt in $ $ 1,500 $ 740 Amt in $ $ 50,000 $ 22,200 Total selling price of mega generator Cost of mega generator (30*740) Total profit(a) $ 760 1 Sales to piggy wiggy grocery s $ 1,73,280 2 sales to Washington D.C. Ni $ 15,656 3 Sales to hospital in the Florida $ 29,300 4 sales made by Home Depot on $1,44,000 $ 27,800 Volume discount on basis of estimation @5% (5%*760) $ 38 $ 3,62,236 Ans Net profit on each generator after discount No. of units sold 9 $ 722 240 $ 1,73,280 installation at a standalone selling price of each Mega Generator 2.0 Cost of installation profit on each installation total profit on 30 installation (b) $ 200 $ 150 $50 $ 1,500 11 2 sales to Washington D.C. Nick Total profit (a+b) $ 29,300 Retail price of mega generator Cost of mega generator Net profit on each generator No. of units sold Amt in $ $ 1,500 $ 740 $ 760 4 sales made by Home Depot on consignment 16 20 $ 15,200 12% interest rate for 3 month note due (15200*12%) *3/12 $ 456 $ 15,656 Retail price of mega generator Cost of mega generator Net profit on each generator No. of units sold (300/4*3) Total profit(a) Less merchants commission @8% (b) (1500*225*8%) Amt in $ $ 1,500 $ 740 $ 760 225 $ 1,71,000 $ 27,000