FOREVER FREE, INC. Income Statement FOREVER FREE, INC. Comparative Balance Sheet As of December 31, 2018 and 2017 For the Year Ended December 31, 2018 Net Sales Revenue $ 3,500,000 2018 2017 Cost of Goods Sold 2,200,000 Assets Gross Profit 1,300,000 Cash $ 64,000 $ 52,000 Operating Expenses Operating Income 950,000 Acsounts Reseivable 49,200 17,800 350,000 Supplies 1,000 400 Other Income and (Expensei): Property. Plant, and Equipment, net 331,800 229,800 Interest Expense (27,000) Patents, net 135,000 119,000 Income Before Income Tax Expense 323,000 Total Assets S 581,000 $ 419,000 Income Tax Expense 113,050 Net Income S 209,950 Liabilities and Stockholders' Equity Accounts Payable $ 19,000 $ 17,000 136,000 Short-term Notes Payable 42,000 Long-term Notes Payable 184,000 114,500 Common Stock, no Par 232,000 242,000 Retained Earnings 12,000 1,500 Total Liabilities and Stockholders' Equity $ 581,000 $ 419,000
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Using ROI and RI to evaluate investment centers
Consider the following condensed financial statements of Forever Free, Inc. The Company’s target fate of return is 40%
Requirements
- Calculate the company’s ROI. Round all of your answers to four decimal places.
- Calculate the company’s profit margin ratio. Interpret your results.
- Calculate the company’s asset turnover ratio. Interpret your results.
- Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
- Calculate the company’s RI. Interpret your results.
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