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Olin Company manufactures and distributes carpentry tools. Production of the tools is in the mature portion of the product life cycle. Olin has a sales force of 20. Salespeople are paid a commission of 7 percent of sales, plus expenses of $35 per day for days spent on the road away from home, plus $0.50 per mile. They deliver products in addition to making the sales, and each salesperson is required to own a truck suitable for making deliveries. For the coming quarter, Olin estimates the following: On average, a salesperson travels 6,000 miles per quarter and spends 38 days on the road. The fixed marketing and administrative expenses total $400,000 per quarter. Required: 1. Prepare an income statement for Olin Company for the next quarter. 2. Suppose that a large hardware chain, MegaHardware, Inc., wants Olin Company to produce its new SuperTool line. This would require Olin Company to sell 80 percent of total output to the chain. The tools will be imprinted with the SuperTool brand, requiring Olin to purchase new equipment, use somewhat different materials, and reconfigure the production line. Olin’s industrial engineers estimate that cost of goods sold for the SuperTool line would increase by 15 percent. No sales commission would be incurred, and MegaHardware would link Olin to its EDI system. This would require an annual cost of $100,000 on the part of Olin. MegaHardware would pay shipping. As a result, the sales force would shrink by 80 percent. Should Olin accept MegaHardware’s offer? Support your answer with appropriate calculations.

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 18, Problem 40P
Textbook Problem
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Olin Company manufactures and distributes carpentry tools. Production of the tools is in the mature portion of the product life cycle. Olin has a sales force of 20. Salespeople are paid a commission of 7 percent of sales, plus expenses of $35 per day for days spent on the road away from home, plus $0.50 per mile. They deliver products in addition to making the sales, and each salesperson is required to own a truck suitable for making deliveries.

For the coming quarter, Olin estimates the following:

Chapter 18, Problem 40P, Olin Company manufactures and distributes carpentry tools. Production of the tools is in the mature

On average, a salesperson travels 6,000 miles per quarter and spends 38 days on the road. The fixed marketing and administrative expenses total $400,000 per quarter.

Required:

  1. 1. Prepare an income statement for Olin Company for the next quarter.
  2. 2. Suppose that a large hardware chain, MegaHardware, Inc., wants Olin Company to produce its new SuperTool line. This would require Olin Company to sell 80 percent of total output to the chain. The tools will be imprinted with the SuperTool brand, requiring Olin to purchase new equipment, use somewhat different materials, and reconfigure the production line. Olin’s industrial engineers estimate that cost of goods sold for the SuperTool line would increase by 15 percent. No sales commission would be incurred, and MegaHardware would link Olin to its EDI system. This would require an annual cost of $100,000 on the part of Olin. MegaHardware would pay shipping. As a result, the sales force would shrink by 80 percent. Should Olin accept MegaHardware’s offer? Support your answer with appropriate calculations.

1.

To determine

Prepare the income statement for Company O for the next quarter.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare the income statement for Company O for the next quarter:

Company O
Income statement
For the Next Quarter
ParticularsAmount ($)
Sales$1,300,000
Less: Cost of goods sold$450,000
Gross profit$850,000
Less: Variable marketing expenses 
    Commission ($91,000)
    Mileage ($60,000)
    Road time ($26,000)
Other marketing and administrative expenses($400,000)
Operating income$272,400

Table (1)

Notes to the above table:

  • Variable expenses on Commission is $91,000(0

2.

To determine

Identify whether the offer from Hardware M will be acceptable or not. Support the decision with calculations.

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Chapter 18 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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