PowerSwitch, Inc: Determine ending inventories after flood; insurance claim letter

PowerSwitch, Inc: Determine ending inventories after flood; insurance claim letter

PowerSwitch, Inc. designs and manufactures switches used in telecommunications. Serious flooding throughout North Carolina affected PowerSwitch's facilities. Inventory was completely ruined, and the company's computer system, including all accounting records, was destroyed.

Before the disaster recovery specialists clean the buildings, Stephen Plum, the company controller, is anxious to salvage whatever records he can to support an insurance claim for the destroyed inventory. He is standing in what is left of the accounting department with Paul Lopez, the cost accountant.

"I didn't know mud could smell so bad, " Paul says. "What would I be looking for?" "Don't worry about beginning inventory numbers, " responds Stephen, "we'll get them from last year's annual report. We need first quarter cost data."

I was working on the first quarter results just before the storm hit, Paul says. Look, my reports still in my desk drawer. All I can make out is that for the first quarter, material purchases were $476,000 and direct labor, manufacturing overhead, and total manufacturing costs to account for were $505,000, $245,000, and $1,425,000, respectively. Wait, and cost of goods available for sale was $1,340,000."

"Great, "says Stephen. "I remember that sales for the period were approximately $1.7 million. Given our gross profit of 30%, thats all you should need." Paul is not sure about that, but decides to see what he can do with this information. The beginning inventory numbers are

Direct materials - $113,000
Work in process - $229,000
Finished goods - $154,000

He remembers a schedule he learned in college that may help him get started.

Requirements:

1. Determine the ending inventories of direct materials, work in process, and finished goods.

2. Draft an insurance claim letter for the controller, seeking reimbursment for the flood damage to inventory. PowerSwitch's insurance representative is Gary Ogleby, at Industrial Insurance Co., 1122 Main Street, Hartford, CT 06268. The policy number is #3454340-23. PowerSwitch address is 5 Research Triangle Way, Raleigh, NC 27698

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Blythe Industries Inc. expects to maintain the same inventories at the end of 2012 as at the beginning of the year

Blythe Industries Inc. expects to maintain the same inventories at the end of 2012 as at the beginning of the year. The total of all production costs for the year is therefore as, summed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates is as follows:

Estimated Estimated Variable Cost
Fixed Cost (per unit sold)
Production costs
Direct materials…………………………………… − $30
Direct Labor………………………………………. − 20
Factory overhead…………………………………. $340,000 11
Selling expenses:
Sales salaries and commissions ………………… 80,000 5
Advertising …………………………………….. 32,000 −
Travel …………………………………………… 8,000 −
Miscellaneous selling expense …………………. 7,000 5
Administrative expenses:
Office and officers’ salaries……………………... 120,000 −
Supplies ………………………………………… 8,000 2
Miscellaneous administrative expense ………… 4,400 2
Total ……………………………………………. $600,000 $75

It is expected that 8,000 units will be sold at a price of $200 a unit. Maximum sales within the relevant range are 9,000 units.

Instructions
1. Prepare an estimated income statement for 2012.
2. What is the expected contribution margin ratio?
3. Determine the break-even sales in units and dollars.
4. Construct a cost-volume-profit chart indicating the break-even Sales.
5. What is the expected margin of safety in dollars and as a percentage of sales?
6. Determine the operating leverage.

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