Q39PGB - Horngren'S Financial And Managerial Accounting

Question

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

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

Salaries and wages \( 10,000

Windshield repair materials 4,100 

Depreciation on truck 500 

Depreciation on building and equipment 900 

Supplies used 450 

Utilities 4,550 

The Glass Doctors earned \)25,000 in service revenues for the month of July by repairing 250 windshields. All costs shown are considered to be directly related to the repair service. 

Requirements 

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

2. Compute the cost per unit of repairing one windshield, rounded to the nearest cent. 

3. The manager of The Glass Doctors must keep unit operating cost below $80 per windshield in order to get his bonus. Did he meet the goal?

Step-by-Step Solution

Answer

The net operating income is $4,500, the unit cost is $82 and the manager was not able to meet the goal.

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

The Glass doctors
Income Statement
Month ended March 31, 2018
	Amount ($)	Amount ($)
Revenues
Net Service Revenue		$25,000
Expenses:
Salaries and wages expense	$10,000
Materials Expense	$4,100
Depreciation expense-Truck	$500
Depreciation expense-Building and Equipment	$900
Supplies Expense	$450
Utilities Expense	$4,550
Total Expenses		$20,500
Operating Income		$4,500

Step 2: Calculation of unit cost

$$\begin{gathered} \mathbf{Unit}\mathbf{ }\mathbf{Cost}\mathbf{=}\frac{\mathrm{Total} \mathrm{Expenses}}{\mathrm{Total} \mathrm{windshields} \mathrm{Repaired}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\$20,500}{250} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{82}\mathbf{.}\mathbf{00} \end{gathered}$$

Step 3: Goal is met or not

The manager of the company must keep the unit operating cost less than $80, but in this case, unit operating cost is $82, which is much higher than $80. So, the manager of the company was not able to meet the goal.