Q31PGA - Horngren'S Financial And Managerial Accounting

Question

Question: Preparing an income statement and calculating unit cost for a service company 

The Windshield Doctors repair chips in car windshields. The company incurred the following operating costs for the month of March 2018:

Salaries and wages \( 12,000 

Windshield repair materials 4,600 

Depreciation on truck 300 

Depreciation on building and equipment 1,200 

Supplies used 300 

Utilities 460 

The Windshield Doctors earned \)23,000 in service revenues for the month of March by repairing 500 windshields. All costs shown are considered to be directly related to the repair service.

 Requirements 

1. Prepare an income statement for the month of March. 

2. Compute the cost per unit of repairing one windshield. 

3. The manager of Windshield Doctors must keep unit operating cost below $50 per windshield in order to get his bonus. Did he meet the goal?

Step-by-Step Solution

Answer

The net operating income is $4,140, the unit cost is $37.72 and the manager is able to meet the goal.

Step-by-Step Solution Step 1: Preparation of income statement

The windshield doctors
Income Statement
Month ended March 31, 2018
	Amount ($)	Amount ($)
Revenues
Net Service Revenue		$23,000
Expenses:
Salaries and wages expense	$12,000
Materials Expense	$4,600
Depreciation expense-Truck	$300
Depreciation expense-Building and Equipment	$1,200
Supplies Expense	$300
Utilities Expense	$460
Total Expenses		$18,860
Operating Income		$4,140

Step 2: Calculation of unit cost

$$\begin{gathered} \mathbf{UnitCost}\mathbf{=}\frac{\mathbf{TotalExpenses}}{\mathbf{TotalwindshieldsRepaired}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{18}\mathbf{,}\mathbf{860}}{\mathbf{500}} \\ \mathbf{=}\mathbf{\$}\mathbf{37}\mathbf{.}\mathbf{72} \end{gathered}$$

Step 3: Goal is met or not

The manager of the company must keep the unit operating cost less than $50, but in this case, unit operating cost is $37.72, which is less than $50. So, the manager of the company was able to meet the goal.