Finance and Accounting The preparation of the income ment is a useful l for profit marking organizations when determining the income generated from their operations. The variable costs are normally used in the process since the management has control on the costs and can be manipulated to improve performance (Kimmel, Weygandt, and Kieso 112). Patti’s Paintings analysis has been done on this paper. Patti’s Painting Contribution Income Statement For the three-month period August 31/2011 Per Unit Total Sales 600 14400 Less: Variable Cost Employee 150 3600 Paint and Supplies 330 7920 Selling expense 15 360 Administrative expense 18 432 Total variable cost 513 12312 Contribution margin 87 2088 Less Fixed cost Selling expenses 25 600 Administrative expenses 62.5 1500 Profit (Loss) (0.5) (12) Contribution margin ratio 14.5% 14.5% Break even sales is the level of sales where the net profit is zero i. e.
a company makes neither profit nor loss (Kimmel, Weygandt, and Kieso 113). Break Even (units) = = = 24.14 Break even sales= = = 14483.76 Evaluation of the three options Option 1 In this option, the decrease in the sales price will result into an increase in the quantity sold. Therefore, we will use the new rates in determining the net profit. In this option, the contribution margin= 580-513 = 67 Net profit in this option = (67*36) - 2100 (Total fixed cost) = $ 312 Break even units= = 31.34 Option 2 The option will enable Patti to paint more houses because of the new online marketing strategy.
Both the selling prices and costs would remain the same. The new contribution margin will therefore be calculated as follows. Contribution margin= 87*45= 3915 Net profit= contribution margin- total fixed cost =3915- (2100+1200) =$ 615 Break even units= = 37.93 Option 3 In this option, the rent would result in an increment in the variable cost.
This would therefore lower the contribution margin by $ 25. New contribution margin per unit= 87-25=62 Net profit= (62*48) – Fixed cost = 2976- 2100 = $ 876 Break even units= =33.87 The evaluation of the best alternative can be done on two bases. First is the use of the new net profit. If this basis is used, option 3 will be the best alternative since it results into the highest operating profit.
The increase in the number of houses to be painted has made the profits go up compared to other options. The second best choice will be option 2 which generates an income of $ 615. Option 1 will result into a profit of $ 312. All this options results into increase in net operating profits compared to the initial income. Using the break even units, option 1 will be ranked the highest followed by option 3 and lastly option 2. It therefore means that option 1 will make Patti start earning profit after selling relatively lower units compared to option 3 and 2.
In all the options, Patti paintings have to consider other determinants like the customer satisfaction, branding of the business and the quality of the services that the business will provide. Sustainability of the options is thus important on the evaluation process. Regulations and practices of the competitors all have to be incorporated. In summary, the urge of businesses to improve their returns and increase their performance calls for the inventions of better methods of increasing profits by either reducing costs or decreasing the cost.
The best evaluation should result into the increase in the net profit f the business. Option 3 therefore deserves to be adopted. The qualitative characteristics should as well be considered at the evaluation of the best option. Work Cited Kimmel, Paul D., Jerry J. Weygandt, and Donald E. Kieso. Accounting: Tools for Business Decision Making. 4e [ed. ] ed. Hoboken, N.J. : Wiley, 2011. Print.