Chapter 1, Problem 26PSB

a.

To determine

Prepare an income statement and the cost waste hamburgers that are prepared in advance.

Answer to Problem 26PSB

Calculation of income statement of the Company MH is as follows:

Table (1)

Hence, the net income is $500.

Calculation of cost of waste hamburgers is as follows:

$\begin{array}{c}\text{Cost of waste hamburgers}=\left(\left(\begin{array}{l}\text{Number of hmburgers prepared in advance}\\ -\text{Number of humburgers sold per day}\end{array}\right)\times \text{Product cost}\right)\\ =\left(\left(\$300-\$240\right)\times \$1.50\right)\\ =(\$60)\times \$1.50\\ =\$90\end{array}$

Hence, the cost of waste hamburger is $90.

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Working notes:

Calculate the revenue:

$\begin{array}{c}\text{Revenue}=\text{Number of humburgers sold (per day)}\times \text{Sales price}\\ =\$240\times \$4.50\\ =\$1,080\end{array}$

Hence, the revenue is $1,080.

(1)

Calculate the total cost of hamburger:

$\begin{array}{c}\text{Cost of hamburber}=\text{Number of hamburgers prepared in advance}\times \text{Product cost}\\ =\$300\times \$1.50\\ =\$450\end{array}$

Hence, the cost of textbooks is $450.

(2)

b.

To determine

Prepare an income statement and determine the amount of profit that is lost from the incapability of serving the 60 additional customers.

Answer to Problem 26PSB

Calculation of income statement of the Company MH in case of 300 customer’s is as follows:

Table (2)

Hence, the net income is $770.

Calculation of income statement of the Company MH in case of 360 customers is as follows:

Table (3)

Calculation of lost profit is as follows:

$\begin{array}{c}\text{Lost profit}=\text{Net income from 260 customers}-\text{Net income from 300 customers}\\ =\$950-\$770\\ =\$180\end{array}$

Hence, the lost profit by rejecting additional customers is $180.

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Working notes:

Calculate the revenue for 300 customers:

$\begin{array}{c}\text{Revenue}=\text{Number of hamburgers prepared in advance}\times \text{Sales price}\\ =\$300\times \$4.50\\ =\$1,350\end{array}$

Hence, the revenue is $1,350.

(3)

Calculate the revenue for 360 customers:

$\begin{array}{c}\text{Revenue}=\text{Number of hamburgers prepared in advance}\times \text{Sales price}\\ =\$360\times \$4.50\\ =\$1,620\end{array}$

Hence, the revenue is $1,620.

(4)

Calculate the total cost of hamburgers in case of 360 customers:

$\begin{array}{c}\text{Cost of hamburber}=\text{Number of hamburgers prepared in advance}\times \text{Product cost}\\ =\$360\times \$1.50\\ =\$540\end{array}$

Hence, the cost of textbooks is $540.

(5)

c.

To determine

Prepare an income statement under the process of just in time system for 240 hamburgers, compare the income statement with requirement a., and comment how this system would affect the profitability.

Answer to Problem 26PSB

Calculation of income statement of the Company MH under just in time system for 240 hamburgers is as follows:

Table (4)

Hence, the net income is $560.

Comparison and comment on the income statement is as follows:

The expenses on the cost of hamburger will come down by using just in time inventory system than traditional inventory system used in requirement a. The revenue remains the same, but just in time inventory system will bring greater net income than traditional inventory system.

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Just in time:

Just in time is a management strategy used by the organizations to decrease waste and increase the efficiency by receiving goods that are required for production which decreases the inventory cost.

Working notes:

Calculate the total cost of hamburgers in case of 240 hamburgers:

$\begin{array}{c}\text{Cost of hamburber}=\text{Number of hamburgers}\times \text{Product cost}\\ =\$240\times \$1.50\\ =\$360\end{array}$

Hence, the cost of textbooks is $360.

(6)

d.

To determine

Prepare an income statement under the process of just in time system for 360 hamburgers are sold, compare the income statement with requirement b., and comment how this system would affect the profitability.

Answer to Problem 26PSB

Calculation of income statement of the Company HM under just in time system for selling 360 hamburgers is as follows:

Table (5)

Hence, the net income is $243,000.

Comparison and comment on the income statement is as follows:

The extra customer order can be accepted because the just in time inventory system increases the employee pay roll cost. Thus, the net income will increase than the traditional inventory system.

Explanation of Solution

Income statement:

Income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.

Just in time:

Just in time is a management strategy used by the organizations to decrease waste and increase the efficiency by receiving goods that are required for production which decreases the inventory cost.

Working notes:

Calculate the revenue for 360 customers:

$\begin{array}{c}\text{Revenue}=\text{Number of hamburgers prepared in advance}\times \text{Sales price}\\ =\$360\times \$4.50\\ =\$1,620\end{array}$

Hence, the revenue is $1,620.

(7)

Calculate the total cost of hamburgers in case of 360 customers:

$\begin{array}{c}\text{Cost of hamburber}=\text{Number of hamburgers prepared in advance}\times \text{Product cost}\\ =\$360\times \$1.50\\ =\$540\end{array}$

Hence, the cost of textbooks is $540.

(8)

e.

To determine

Discuss the probable effects of the just in time inventory system on the level of customer satisfaction.

Explanation of Solution

Just in time:

Just in time is a management strategy used by the organizations to decrease waste and increase the efficiency by receiving goods that are required for production which decreases the inventory cost.

The probable effect of just in time inventory system on the level of customer satisfaction is as follows:

The just in time inventory system helps in preparing the fresh hamburgers and can prepare according to the customers taste and preferences that increase the level of customer satisfaction. An increase in customer satisfaction will increase the purchase and revenues which in return, leads to higher profits.