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Incremental income statement

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A company is considering offering a new product. The sales of the new product are forecasted to be $700,000 in year 1 of the planning period, double in year 2, and increase by $50,000 each year thereafter. COGS for the new product are estimated at 50% of the revenue in year 1 and this percentage is reduced by 5% each year after year 1 (45% in year 2, 40% in year 3, etc.).

It is expected that sales of an existing product will be cannibalized (reduced) by $250,000 in year one and this reduction will increase by 20% per year for the remaining years in the planning period. For instance, the revenue reduction in year 2 is $250,000 +20% of this, or $300,000. The COGS for the existing product is a constant 40% of the Revenue for all years.

S.G.& A costs including depreciation are expected to be constant at $250,000 annually over the planning horizon for the new product. (e.g. you do not have to compute deprecation.) The tax rate is 15%. The company uses a MARR of 13%.

If the needed upfront investment would be $6 million, construct an incremental Income statement (no cash flow statement required) showing the effect on Net Earnings of the new product.

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Incremental income statement

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Contribution margin, incremental analysis, income statement

See attached file.

Lewis Manufacturing Company has four operating divisions. During the first quarter of 2005, the company reported aggregate income from operations of $176,000 and following division results. See attachment.

Instructions

a. Computer the contribution margin for divisions I and II?
b. Prepare an incremental analysis concerning the possible discontinuance of (1) Division I and (2) Division II. What course of action do you recommend for each division?
c. Prepare a columnar condensed income statement for Lewis Manufacturing, assuming Division II is eliminated. Use the CVP format. Division II's unavoidable fixed cost are allocated equally to the continuing divisions.
d. Reconcile the total income from operations ($176,000) with the total income from operations without Division II.

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