Question

A furniture company is producing and selling several products for grass sales (income) of 2.25 million shillings. Retums and allowances are 4 percent of gross sales, reducing the income to net sales. Marketing, management, and general expenses (MM&G Jare figured to be 18% of the net sales. Cost of goods sold is the sum of labor (14% of sales), materials (23% of sales) and overhead Overhead is figured to be variable overhead (28% of the combined cost of labor and matcrials) plus fixed overhead (kshs 30,000). Gross profit is the difference between net sales and cost of goods sold. To figure the profit before tax, MM&G expenses need to be subtracted from the gross profit Finally, there is the 27% VAT and 3% withholding taxes that need to be considered, but these are only assessed if there is indeed a profit; if the profit before tax is zero or below (a loss from operations), the tax is zer (you will need to use the IF function here). 1. What is the change in net income resulting from a plan that would reduce the materials cost fraction to 20% per year but would increase labor costs to 16%?

Answer 1

Assumptions:- All percentages including VAT and withholding tax are to be applied on gross sales figures, except MM&G expense which is calculated on Net sales Figure.

Any deviation from above assumptions may lead to a different answer.

Please comment if you have any issues with the above stated assumptions.

As seen above, the net effect of the proposal is that the Net Loss would be reduced by 28,800. (161,900-133,100)

Exisitng Amounts Details 2,250,000 (90,000) 4% of 2250000 2,160,000 Proposed Plan Details 2,250,000 (90,000) 4% of 2250000 2,160,000 Gross Sales Less:- Return & Allowances Net Sales (A) Less:- Cost of Goods Sold - Labour Cost - Material Cost Subtotal of Labour and Material Costs |- Overheads Variable |- Overheads Fixed Total Cost of Goods Sold (B) (315,000) 14% of 2250000 (517,500) 23% of 2250000 (832,500) (233,100) 28% of 832500 (80,000) (1,145,600)| (360,000) 16% of 2250000 (450,000) 20% of 2250000 (810,000) (226,800) 28% of 810000 (80,000) (1,116,800) Gross Profit (A) - (B) Less:- Marketing Management & General Expenses Profit Before Tax Less:-VAT Less:-Withholding Tax Net Profit After taxes 1,014,400 (388,800) 18% of 2160000 625,600 (607,500) 27% of 2250000 (180,000) 8% of 2250000 (161,900)| 1,043,200 (388,800) 18% of 2160000 654,400 (607,500) 27% of 2250000 (180,000) 8% of 2250000 (133,100)

Please comment in case of any doubts or queries.