Chapter 10, Problem 26P

a.

To determine

Prepare an income statement and the cost of unused books.

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.

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

Income Statement of Company CM
Particulars	Amount (S)	Amount (S)
Revenue (1)		142,500
Less: Expenses
Cost of text books (2)	8,800
Cost of teachers	36,000
Other operating expenses	40,000	84,800
Net income		57,700

Table (1)

Hence, the net income is $57,700.

Calculation of cost of unused books is as follows:

$\begin{array}{c}\text{Cost of unused books}=\left(\left(\begin{array}{l}\text{Expected number of students}\\ -\text{Actual number of students}\end{array}\right)\times \text{Text book cost}\right)\\ =\left(\left(\$110-\$95\right)\times \$80\right)\\ =(\$15)\times \$80\\ =\$1,200\end{array}$

Hence, the cost of waste associated with the unused books is $1,200.

Working note (1):

Calculate the revenue:

$\begin{array}{c}\text{Revenue}=\text{Fees of per student}\times \text{Number of students}\\ =\$1,500\times \$95\\ =\$142,500\end{array}$

Working note (2):

Calculate the total cost of textbooks:

$\begin{array}{c}\text{Cost of textbooks}=\text{Cost of each textbook}\times \text{Number of textbooks ordered}\\ =\$80\times \$110\\ =\$8,800\end{array}$

b.

To determine

Prepare an income statement and ascertain the amount of profit that is lost from the incapability of serving the 5 additional students.

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.

Calculation of income statement of the Company CM for 110 students is as follows:

Income Statement of Company CM
Particulars	Amount (S)	Amount (S)
Revenue (3)		165,000
Less: Expenses
Cost of text books	8,800
Cost of teachers	36,000
Other operating expenses	40,000	84,800
Net income		80,200

Table (2)

Hence, the net income is $80,200.

Calculation of income statement of the Company CM for 115 students is as follows:

Income Statement of Company CM
Particulars	Amount (S)	Amount (S)
Revenue (4)		172,500
Less: Expenses
Cost of text books (5)	9,200
Cost of teachers	36,000
Other operating expenses	40,000	85,200
Net income		87,300

Table (3)

Calculation of lost profit is as follows:

$\begin{array}{c}\text{Lost profit}=\text{Net income from 115 students}-\text{Net income from 110 students}\\ =\$87,300-\$80,200\\ =\$7,100\end{array}$

Hence, the lost profit by rejecting additional students is $7,100.

Working note (3):

Note:

115 students attempted to register but only 110 students could be accepted.

Calculate the revenue for 220 students:

$\begin{array}{c}\text{Revenue}=\text{Fees of per student}\times \text{Number of students}\\ =\$1,500\times \$110\\ =\$165,000\end{array}$

Working note (4):

Calculate the revenue for 115 students:

$\begin{array}{c}\text{Revenue}=\text{Fees of per student}\times \text{Number of students}\\ =\$1,500\times \$115\\ =\$172,500\end{array}$

Working note (5):

Calculate the total cost of textbooks:

$\begin{array}{c}\text{Cost of textbooks}=\text{Cost of each textbook}\times \text{Number of textbooks ordered}\\ =\$80\times \$115\\ =\$9,200\end{array}$

c.

To determine

Prepare an income statement under the process of just in time system for 95 students, compare the income statement with requirement a., and comment how this system would affect the profitability.

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.

Calculation of income statement of the Company CM under just in time system for 95 students is as follows:

Income Statement of Company CM
Particulars	Amount (S)	Amount (S)
Revenue (1)		142,500
Less: Expenses
Cost of text books (6)	8,550
Cost of teachers	36,000
Other operating expenses	40,000	84,550
Net income		57,950

Table (4)

Hence, the net income is $57,950.

Comparison and comment on the income statement is as follows:

The expenses on the cost of textbooks 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.

Working note (6):

Calculate the total cost of textbooks:

$\begin{array}{c}\text{Cost of textbooks}=\text{Cost of each textbook}\times \text{Number of textbooks ordered}\\ =\$90\times \$95\\ =\$8,550\end{array}$

d.

To determine

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

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.

Calculation of income statement of the Company CM under just in time system for 115 students is as follows:

Income Statement of Company CM
Particulars	Amount (S)	Amount (S)
Revenue (7)		172,500
Less: Expenses
Cost of text books (8)	10,350
Cost of teachers	36,000
Other operating expenses	40,000	86,350
Net income		86,150

Table (5)

Comparison and comment on the income statement is as follows:

The extra revenue from 5 students would increase the cost of books under just in time inventory system. Therefore, it results in greater net income than the traditional inventory system.

Working note (7):

Calculate the revenue for 240 students:

$\begin{array}{c}\text{Revenue}=\text{Fees of per student}\times \text{Number of students}\\ =\$1,500\times \$115\\ =\$172,500\end{array}$

Working note (8):

Calculate the total cost of textbooks:

$\begin{array}{c}\text{Cost of textbooks}=\text{Cost of each textbook}\times \text{Number of textbooks ordered}\\ =\$90\times \$115\\ =\$10,350\end{array}$

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:

Students who are deprived of from the enrollment might create a negative impression on the Company CM. This negative image can be spread easily among the public. The just in time system could help the company to improve the customer satisfaction level and increase their net income.