Question

Jean and Tom Perritz own and manage Happy Home Helpers Inc. (HHH), a house cleaning service. Each cleaning (cleaning one house one time) takes a team of three house cleaners about 1.5 hours. On average, HHH completes about 15,000 cleanings per year. The following total costs are associated with the total cleanings:

Next year, HHH expects to purchase $25,600 of direct materials. Projected beginning and ending inventories for direct materials are as follows:
There is no work-in-process inventory and no finished goods inventory; in other words, a cleaning is started and completed on the same day. HHH expects to sell 15,000 cleanings at a price of $45 each next year. Total selling expense is projected at $22,000, and total administrative expense is rojected at $53,000.

Required:

1. Prepare an income statement in good form.

2. What if Jean and Tom increased the price to $50 per cleaning and no other information was affected? Explain which line items in the income statement would be affected and how.

Answer 1

For the answer to the question above,

Revenues from sales;
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$675,000
Cost of goods sold:
Materials inventory (beginning) . . . . . . . . .$. 4,000
Materials purchases . . . . . . . . . . . . . . . . . . . . .25,600
Materials available for use . . . . . . . . . . . . . . .29,600
Less:
Materials inventory (ending) . . . . . . . . . . . . .2,600
Cost of materials used . . . . . . . . . . . . . . . . . . . . . . . . . .$. 27,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .472,000
Variable overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Fixed overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
Total cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .532,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .143,000
Operating expenses:
Selling expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22,000
Administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .53,000
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$. 68,000