Neilsen's Woodworking Company came to you for assistance when the bookkeeper presented the income statement showing...

  

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Neilsen's Woodworking Company came to you for assistance when the bookkeeper presented the income statement showing large loss for the second year of operations. The loss of P70,000 was expected for the first year when the company operated at low level. However, the management of Neilsen's Woodworking was shocked to discover a loss of P160,000 for the second year. The president of the company could not understand how they could be operating at near-capacity and losing money. The company was consistently short of cash, a common problem when operations are expanding. From your preliminary examinations, you found very poor accounting records. You are satisfied that the data in the financial statements are correct and that there is no significant fraud. The company manufactures a line of kitchen cabinets. Because of the lack of detailed records, it is impossible to develop data about the cost of the product. The selling price was set by the president to undersell competition. Condensed income statements are presented below. Sales (P40 each) Operating expenses: NEILSEN'S WOODWORKING Income Statement 20X3 and 20X4 20X3 Beginning inventory of materials Operating expense Total Ending inventory of materials Expenses for the year Net loss 20X4 P 100,000 P 0 190,000 P 190,000 20,000 P 170,000 P(70,000) P 400,000 P 20,000 570,000 P 590,000 30,000 P 560,000 P(160.000) Other data: Units produced Units sold Assets invested in business Capacity in units 2,500 units 2,500 units P100,000 12,000 10,000 units 10,000 units P100,000 12,000 Required: A. Why did the company lose P160,000 in the second year? How much would the company lose if they operated at capacity? B. What price must be set to earn a profit of 8% of sales? C. What price must be set to earn a contribution margin ratio of 30%? D. What price must be set to earn 15% on the assets invested in the business? Neilsen's Woodworking Company came to you for assistance when the bookkeeper presented the income statement showing large loss for the second year of operations. The loss of P70,000 was expected for the first year when the company operated at low level. However, the management of Neilsen's Woodworking was shocked to discover a loss of P160,000 for the second year. The president of the company could not understand how they could be operating at near-capacity and losing money. The company was consistently short of cash, a common problem when operations are expanding. From your preliminary examinations, you found very poor accounting records. You are satisfied that the data in the financial statements are correct and that there is no significant fraud. The company manufactures a line of kitchen cabinets. Because of the lack of detailed records, it is impossible to develop data about the cost of the product. The selling price was set by the president to undersell competition. Condensed income statements are presented below. Sales (P40 each) Operating expenses: NEILSEN'S WOODWORKING Income Statement 20X3 and 20X4 20X3 Beginning inventory of materials Operating expense Total Ending inventory of materials Expenses for the year Net loss 20X4 P 100,000 P 0 190,000 P 190,000 20,000 P 170,000 P(70,000) P 400,000 P 20,000 570,000 P 590,000 30,000 P 560,000 P(160.000) Other data: Units produced Units sold Assets invested in business Capacity in units 2,500 units 2,500 units P100,000 12,000 10,000 units 10,000 units P100,000 12,000 Required: A. Why did the company lose P160,000 in the second year? How much would the company lose if they operated at capacity? B. What price must be set to earn a profit of 8% of sales? C. What price must be set to earn a contribution margin ratio of 30%? D. What price must be set to earn 15% on the assets invested in the business?

Answer rating: 100% (QA)

A Company has set selling price at very low to gain more sales in competition This resulted in low c... View the full answer