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Accounting 12 Project

Team: Baked My Heart


Josephine Hulburd
Rachel Liu
Nick Zakaluk
Phase 1:
A. What is your product? Why has your group selected this as a product to make?
a. Our product is chocolate chip cookies since it is low cost and low labor.
B. Product Manufacturing:
a. How is the product made? (If it is a food item, type the recipe here. If not food,
use a recipe format to convey how one goes about making this product.)
i. Position 2 racks in the center of the oven, and preheat to 375 degrees F.
Line 2 baking sheets with parchment.
ii. Whisk together the flour, baking soda and 1 teaspoon salt in a large bowl.
iii. Beat the butter and both sugars on medium-high speed in the bowl of a
stand mixer fitted with a paddle attachment (or in a large bowl if using a
handheld mixer) until light and fluffy, about 4 minutes. Add the eggs, one
at time, beating after each addition to incorporate. Beat in the vanilla.
Scrape down the side of the bowl as needed. Reduce the speed to medium,
add the flour mixture and beat until just incorporated. Stir in the chocolate
chips.
iv. Scoop 12 heaping tablespoons of dough about 2 inches apart onto each
prepared baking sheet. Roll the dough into balls with slightly wet hands.
Bake, rotating the cookie sheets from upper to lower racks halfway
through, until golden but still soft in the center, 12 to 15 minutes (the
longer the cook time, the crunchier the cookies). Let cool for a few
minutes on the baking sheet, and then transfer to a rack to cool
completely.
1. Ingredients:
a. 2 1/4 cups all-purpose flour
b. 1 teaspoon baking soda
c. Fine salt
d. 1 1/2 sticks (12 tablespoons) unsalted butter, at room
temperature
e. 3/4 cup packed light brown sugar
f. 2/3 cup granulated sugar
g. 2 large eggs
h. 1 teaspoon pure vanilla extract
i. One 12-ounce bag semisweet chocolate chips
b. Decide where the product will be made (group member’s dorm, apartment etc).
Make a list of the facilities that will be needed. Be as complete as possible. (e.g.:
oven, table, pans, mixers, refrigerator, etc. Do a “Google” search and find out
what it would cost to rent a fully equipped facility for a day. We will assume that
rent includes any indirect materials you may need. Include the name of and a link
to the web site you used and the cost of one day’s rent here.
i. Location: Graham Kitchen
ii. Required items:
1. Oven
2. Baking sheets
3. Bowls
4. Mixer
iii. Facilities to rent:
1. $1000 + first months rent ($395)
2. $1395 for one months rental
3. San Jose Kitchen Rentals
4. http://www.sjkitchenrentals.com/rates_and_starting_guidelines
C. Cost of Items:
a. (i) Shop for the materials needed. List the items purchased and the cost of each of
the items. Total the cost.
Product Cost

Butter (16 oz) $3.49

Baking Soda (16oz) $0.79

Flour (5 lb) $3.48

Salt (26.5 oz) $1.69

Eggs (12 Count) $2.49

Vanilla Extract ( 1fl. oz) $5.99

Chocolate Chips (24 oz) $5.20

Baking Sheet (25 Count)(not RM) $3.99

Total $27.12(23.13 w/o baking sheet(PPE))


b. Who did you send to the store? Record the time spent to get to the store, shop,
and put items away. If you traveled to the store(s) by car, estimate the cost of
using the car at $.45/mile. Quantify the total cost of shopping for the materials.
These costs are indirect labor costs. Be efficient. Not everyone needs to go
shopping together. Keep costs low by sending one person to the store. If more
than one store must be visited, send one person to get some things at Store A, one
to Store B, etc. or determine if on-line ordering and delivery are most efficient.
i. Rachel walked to the Safeway across from Santa Clara University (2605
The Alameda, Santa Clara, CA 95050). It took her a total of one hour to
walk to Safeway, purchase the ingredients, and put the items away.
(1*10)= $10 indirect labor.
D. Make the product. Record the amount of time involved in making the product (Direct
Labor). Show who did what, how long it took, and what the direct labor cost at $10 per
hour turns out to be.
a. It took 2.5 hours to make the chocolate chip cookies from start to finish (including
prep time and clean up time). 1 of us made the cookies at 2.5 hours to lower labor
costs. ((1*2.5)*10))= $25 in direct labor.
E. Estimate and quantify the dollar value of the direct materials remaining on-hand (Ending
Balance of Raw Materials Inventory). Compute the raw materials used. (for example:
For RM: BI+Purchases-EI=RMU) Insert your answers in the appropriate grid boxes in
“H” below.
a. Ending Balance of Raw Materials Inventory=$10.53. Raw materials
used=$12.60.

Product Cost Used (Calculations)

Butter (16 oz) $3.49 16oz (4 sticks)=$3.49

Baking Soda (16oz) $0.79 2 teaspoons (.33 oz x


.79)=$0.26

Flour (5 lb) $3.48 (4.5 cups used/20 cups


total)(3.48)=$0.78

Salt (26.5 oz) $1.69 2 teaspoons (0.8


oz/26.5)($1.69)=$0.05

Eggs (12 Count) $2.49 4/dozen eggs x $2.49=$0.83

Vanilla Extract ( 1fl. oz) $5.99 2 teaspoon=(.33 fl. oz x


5.99)=$1.99
Chocolate Chips (24 oz) $5.20 24 oz=5.20

Total $23.13 $12.60

F. Record the amount of cleanup and supervisory time involved. Quantify the cost of these
tasks (Indirect Labor).
a. Indirect Labor: Maintenance employee: Rate $11 per hour; 1 hour of cleanup
Kitchen Supervisor: Rate $15 per hour; 1 hour of cooking time. 11+15= $26 indirect labor.
G. Estimate the time spent on the accounting/recording tasks and quantify these costs
(Administrative Time).
a. Accounting: Rate $20 per hour; 30 minutes of accounting ($20 x .5=$10)
H. Put dollar costs of all materials used (from “E”), for labor (from D, F & G) and for
facility rent (from BII) on the grid here, as was done in Problem 2-15. Reference each
cost on the grid to A-G above. (for example: Direct Labor is from "D" above).[6 points]
Note: Please keep grid all on the same page for ease of review. See following example.

Cost Item
Variable Fixed Selling Admin. (Product Cost) Reference
Cost Cost Direct Indirect

Raw Mat Used (RMU) 12.60 12.60 E.

Dir. Labor 25 25 D.

Indirect Labor 26 26 F.

Facility Rent (month) 395 395 B.

Accounting 10 10 G.

Totals 63.6 405 10 37.6 421

I. Total all product costs on the grid (both direct and indirect - last 2 columns only). From
your total product cost, what was the per unit product cost of making this product? (If
you made one batch of the product, how many were in the batch? Divide total cost by the
number in the batch to get the cost per product?) Show all calculations. [3 points]
When only account for product costs the total is $63.6 and this produces 60 cookies. So it costs
us $1.06 to make one cookie within the 2.5 hour time period.
J. Comment on what lessons were learned in this process of the prototype. Address each of
the following areas: [12 points]
a. Assuming you had enough raw materials to do so, would there be time savings
achieved by making more than one batch at a time? How so? If so, quantify the
time and dollar savings you would estimate for both direct and indirect labor.
With the facilities that we have looked at for our business we would be able to produce an extra
10 batches easily within the same amount of time. That would be an extra 600 cookies. While
producing only 60 cookies direct labor costs are 25 divided by 60 which equals $0.4167 per
cookie and the indirect labor costs for producing 60 cookies is 26 divided by 60 which equals
$0.4334 per cookie. With an increase in production from 60 cookies per 2.5 hours to 660 cookies
per 2.5 hours we would see a dramatic decrease in direct and indirect labor costs per cookie. For
660 cookies labor direct labor costs would 25 divided by 660 which equals $0.038 per cookie.
For indirect labor costs that would be 26 divided by 660 and that equals $0.039 per cookie.

b. Given the day’s rent that had to be paid whether you made one batch or many
batches, what would you like to be able to do to reduce your unit product cost?
Make an investment in better equipment as to produce cookies faster. Though this would be in an
upfront cost and may put us in a poor economic state for a little, it would definitely benefit us in
the long run. Also revisiting the recipe and seeing what ingredients we should prioritize keeping
high quality and what ingredients we shouldn't so that we spend less on what isn’t as important.

c. Redo the grid for the new # of batches made and recalculate the unit product cost
assuming you could achieve the economies of scale discussed above.

Cost Item
Variable Fixed Selling Admin. (Product Cost) Reference
Cost Cost Direct Indirect

Raw Mat Used (RMU) 138.6 138.6 E.

Dir. Labor 25 25 D.

Indirect Labor 26 26 F.
Facility Rent (month) 395 395 B.

Accounting 10 10 G.

Totals 138.6 456 10 163.6 421

d. Are there other things you would do differently if you decided to bring this
product to market?
We would find an advantageous location to sells these where we would have little competition
directly surrounding us. If we were actually bringing this product to market with a store front and
everything than we would prefer to have a blank kitchen where we buy all the appliances which
would be in the back of our storefront. This would be a lot more costly in the beginning but
definitely has its merits in the long term, plus it is specifically built to our needs.
Accounting 12 Project
Team: Baked My Heart
Josephine Hulburd
Rachel Liu
Nick Zakaluk
PHASE II
A. If direct laborers work at capacity, how many products get made each day? Each month?
(Start with the information from Phase 1 (J)(iii) on how long it took to make "x" number
of batches, then extrapolate to get # of batches in an 8 hour day. Make and show any
adjustments to reflect more or less workers added to your direct labor crew.) Multiply the
result in batches by the # of products per batch for # of products per day. Multiply that
by 22 days to get # of products produced each month.
a. If it takes us 2.5 hours to make 660 cookies, with 8 hours we can make 1,980
cookies a day ( 8/2.5=3.2; 3*660=1,980) (because 2.5 is uneven there will be 7.5
of actual baking time)
b. That would be 43,560 cookies a month (22days*1,980=43,560)
B. How much will you spend on direct materials to produce to capacity each month? (make
calculation based on info in Phase1(J)(iii).)
a. $9147.60 in direct materials($138.6*3*22=$9147.6)
C. List and quantify your direct labor cost per month with production at capacity.
a. With two bakers working at $10 an hour for 7.5 hours, direct labor will be $3,300
a month ($10*8hrs*2 employees*22 days=$3300)
D. List & quantify your manufacturing overhead costs per month (last column)
a. $1600 Rent + $400 Utilities + $600 Janitorial services = $2,600 per month
E. What method of overhead allocation will your company use (recall your making only one
product)?
a. We are going to use the absorption costing method of overhead allocation.
Because we are only producing and selling one product it is easier to use the total
cost method to understand when we have made back a majority of our money and
have started turning a profit.
F. List and quantify your period costs per month.
a. Salesperson wage: $10*8hrs*22 days= $1760
b. Accountant wage: $10*2hrs*22 days= 440
G. Insert the information obtained from A-F above into the grid below. Reference cost in the
grid to the task A-F where it was calculated:
Phase 2 Monthly Costs Ref

Product Costs

Cost Item V F Selling Admin Direct Indirect

Direct 9147.6 9147.6 B.


Materials
Used

Direct 3300 3300 C.


Labor

Indirect 600 600 D.


Labor

Rent 2000 400 1600 D.

Utilities 500 100 400 D.

Salesperson 1760 1760 F.

Accountant 440 440 F.

Other:

Totals 9147.6 8600 2260 440 12447.6 2600

H. Assume you are operating at capacity within the relevant range. What are the company’s
total monthly fixed costs? Total monthly variable costs?
a. Total monthly fixed costs= $3300+$600+$2000+$500+$1760+$440= $8600
b. Total monthly variable costs= $9147.6
I. Using the formula of:
a. Sales - Variable costs = contribution margin - fixed costs = Net Income
i. ($43560*$1 per cookie)- $9147.6= $34412.4
ii. $34412.4- $8600= $25812.4 Net Income
b. And your knowledge of what fixed costs are from G above, what dollar level of
monthly sales must your company have to break-even?
i. =9147.6+8600= $17,747.60 to break-even
J. Based on the number of products made each month when at capacity (“A” above), what
is the minimum you charge for each product in order to break-even? Briefly explain
whether this price is reasonable based on known competition. What conclusions do you
draw from this analysis? (Can you charge more than the minimum price in order to make
more money?)
a. $17747.60/43,560 cookies≈$0.41 per cookie to break even. After doing a little
research a small cookie (similar to the size of ours) retails for about $1.25 a
cookie. With this in mind, looking at our break even price, we can conclude that
selling at break even is not a smart decision because we can make a lot more
money if we sell at around market price.
K. Determine the sales price per product that you intend to charge. Assuming you can sell all
you make, what will be your net income for the month, based on this selling price per
product?
a. If we sell our cookies at $1 a cookie then we will have a revenue of $43,560
($1*43650 = $43560). To break even for the month we have to make $17,747.6.
Thus our profit for the month would be $25,812.40 ($43,560-$17,747.6=
$25,812.40)
L. Based on J and K above, compute your margin of safety.
a. Our margin of safety would be $25,812.40
i. 43,560 - 17,747.60 = 25,812.40
b. Or 59.26%
i. 25,812.40/43,560 = 0.75 * 100 = 52.26%
M. Based on K above, compute your degree of operating leverage.
a. Our degree of operating leverage is 1.33.
i. 34,412.40 / 25,812.40 = 1.33
Accounting 12 Project
Team: Baked My Heart
Josephine Hullburd
Rachel Liu
Nick Zakaluk
Phase III
A. The first page of this Phase should be the summary grid in "G" and the income
statement in "K" from Phase 2 of the project. Also prepare a contribution format
income statement for the month that reconciles to the GAAP format. ​[3 points]
To get your company started on January 1, each group member pays $5,000 cash
each for stock in your corporation. Record the effect of this cash receipt in your
cash budget under “​Financing”.​ (Note: If you intend to automate parts of your
production process by buying equipment with some of this money, and laying off
workers, this is a good place to articulate what you are going to buy, its estimated
useful life, and how that will affect your direct labor situation. Show all
calculations and a revised grid using the Phase 2 grid format.)
a.
Phase 2 Monthly Costs Ref

Product Costs

Cost Item V F Selling Admin Direct Indirect

Direct 9147.6 9147.6 B.


Materials
Used

Direct 3300 3300 C.


Labor

Indirect 600 600 D.


Labor

Rent 2000 400 1600 D.

Utilities 500 100 400 D.

Salesperson 1760 1760 F.

Accountant 440 440 F.

Other:
Totals 9147.6 8600 2260 440 12447.6 2600

b. Contribution Format:
Revenue $43,560 (From Phase II)
-VC $9,147.60 (From Grid)

CM $34,412.60
-FC $8,600 (From Grid)

NOI $25,812.40

c. GAAP Format
Revenue $43,560 (From Phase II)
-CGS $15,047.6 ($12,447.6+ $2600)

GM $28,512.40
-Op. Exps $2,700 ($2,260+ $440)

NOI $25,812.40
B. (i) Your company pays incorporation, business license and attorney fees of $3,000
on January 2. Consider this an administrative expense. (ii) Prepare a GAAP-based
income statement for the quarter ​[3 points]
a. GAAP Format- Quarter
Revenue $130,680 ($43,560*3)
-CGS $45,142.80 ($15,047.6*3)

GM $85,537.20
-Op. Exps $11,100 ($2,700*3 + $3,000)

NOI $74,437.2
C. The landlord wants a first and last month rent deposit before you may commence
operations in the facility ($4,000). The check is sent Jan. 2​nd​. For subsequent
months, the rent is due on the first of each month.{Hint here: you'll need a
non-current asset account called ​Security deposit​ to hold the last month's rent
amount}
a. Security Deposit… $4,000
Cash… $4,000
b. Rent Expense… $2,000
Cash… $2,000

For D-I below, assume the following:


· you can sell all you can produce;
· you have no ending inventory in WIP or FG (only Raw Materials);
· you pay your employees on the 1​st​ and the 15​th​ of each month. Your first payroll
is on 1/15/xx.
· You must have ending raw materials inventory so that workers have something to
do on the first day(s) of the month.
D. You are now ready to start your business​.
a. Set-up a chart of accounts. What Balance Sheet accounts will you need?
What Income Statement accounts? (See 9-20 for starters) In columnar
format, list the account underneath the financial statement it will be a part
of. ​[3 points]
i. Chart of Accounts
Cash Accrued Wages Payable
Raw Materials Inventory Common Stock
Security Deposit Retained Earnings
b. Develop a sales budget for the quarter (Jan-Mar) based on the capacity
production developed in Phase II being sold. (Tell me the sales in units for
each month, and the sales dollars for each month (units x price per unit)
Determine & articulate whether sales will be on account (A/R) or that you
will only accept cash or credit card. (Credit card fees run about 3% of the
gross sales amount.) ​[2 points]
i. Sales will only be accepted in cash
ii. Budgeted Sales:
Jan Feb Mar Total

$43,560 $43,560 $43,560 $130,680 ($43,560*3)

c. Make a schedule of cash collections for each month and for the quarter
ended 3/31. ​[2 points]
i. Assume all sales collected month in of the sales
ii. Budgeted Collections:
Jan Feb Mar Total

$43,560 $43,560 $43,560 $130,680 ($43,560*3)

E. (i) Develop a raw materials purchasing budget to accommodate monthly production


capacity & desired ending inventory level of raw materials only (state what your desired
Ending Inventory is, & assume your April sales will be the same as March sales). ​[4
points]
i. Assume ending inventory in 10% of next month’s sales
Raw Material inventory Purchases:
RMU each month 9147.60 9147.60 9147.60 *27,441.80
+Desired EI 914.76 914.76 914.76 914.76
Total Needs 10,062.36 10,062.36 10,062.36 28,356.56
-Begin. Inventory 0 914.76 914.76 0
Required Purchases 10,062.36 9147.60 9147.60 28,356.56

(*9147.60x3=27,441.80)

(ii) Articulate when and how you pay your vendors. Develop a schedule of cash
disbursements for raw materials inventory purchases for each month and for the quarter.
[2 points]
ii. Raw materials purchases are paid for in the month of purchase in cash at the beginning
of the month.

Jan Feb Mar Quarter

Cash Paid for RM 10,062.36 9147.60 9147.60 28,356.56*

(*10,062.36+9147.60+9147.60=28,356.56)
(iii) Develop a schedule of cash disbursements for your payroll for each month and for
the quarter (paying direct, indirect laborers, salesperson, accountant. If the accountant
and janitor are outsourced, do not include them here. Hint: You WILL have a liability at
3/31 for Accrued Payroll [wages incurred but not paid until 4/1]) ​[3 points]

Our janitor is outsourced and there are no other indirect laborers (no supervisor) on the
payroll but our accountant is not.
Everyone is paid at the beginning of the next month.
iii. Budgeted payments for wage earners:
OyJan Feb Mar. Quarter
Direct Labor Payments 0 3300 3300 6600
Accountant 0 440 440 880
Salesperson 0 1760 1760 3520
Cash paid for payroll 0 5500 5500 11000

(iv) Develop a schedule of cash disbursements for rent, utilities and any other
non-payroll ​overhead​ for each month and for the quarter in total. ​[3 points​]
Jan Feb Mar. Quarter
Janitor service 600 600 600 1,800
Rent 1,600 1,600 1,600 4,800
Utilities 400 400 400 1,200
Total 2,600 2,600 2,600 7,800

F. ​Proceed with the schedule of other cash disbursements made for your non-payroll
selling and administrative expenses, your start-up costs from above, and your Security
Deposit. ​[3 points]
Jan Feb Mar. Quarter
Start-up costs 3000 - - 3000
Security Deposit 4000 - - 4000
Rent 400 400 400 1200
Utilities 100 100 100 300
Cash paid 7500 500 500 8500
G. Prepare a cash budget for each month and for the quarter ended 3/31/xx.
Make sure you include all cash received and all cash disbursed from A-G above.
Reference​ inside the budget which schedule the amount comes from​. [4 points]

Jan Feb Mar Quarter

Beginning Balance 0 32,397.64 64,210.04 0

Cash Collections-Sales 43,560 43,560 43,560 130,680

Cash Disbursements:

For Raw Materials 10,062.36 9,147.60 9,147.60 28,357.56

For Wages 0* 5,500 5,500 11,000

For O/H (non-P/R) 2,600 2,600 2,600 7,800

For SGA, Sec Deo (non-P/R) 7,500 500 500 8,500

Excess Cash Received (Disb’d) 23,397.64 64,210.04 90,022.44 75,022.44

Financing:

From S/H 15,000 0 0 15,000

Cash at End 38,397.64 64,210.04 90,022.44 90,022.44

*We pay a month’s worth of wages at the beginning of the next month
.
H. Prepare a budgeted multi-step income statement ​and ​classified balance sheet for the
quarter ended 3/31/xx. Make sure you show your Retained Earnings reconciliation. ​[12
points]
Multi-step Income Statement:
Sales 130,680

-COGs 45,142.80

Gross Margin 85,537.20

-Selling Exps 6,780

-G&A 4,320
Net Operating Income 74,437.20

Schedule of RE:
Beginning Balance 0

Net Income 74,437.20

End Balance 74,437.20


Forecast Balance Sheet:
Assets
Current Assets:

Cash 90,022.44

Raw Mats Inv. 914.76

Total Current Assets 90,937.20

Security Deposit 4,000

Total Assets 94,937.20

Liabilities
Current Liabilities:

Accrued Wages Payable 5,500

Total Current Liabilities 5,500

Total Liabilities 5,500

Stockholders’ Equity
Common Stock 15,000

Retained Earnings 74,437.20

Total Stockholders’ Equity 89,437.20

Total Liabilities & Stockholders’ 94,937.20


Equity
I. Evaluate the results of your first quarter by examining key ratios for liquidity,
solvency & profitability. ​Start​ by using the ​Dupont formula​ you learned about in
ACTG 11[ROE=Profit Margin x Asset Turnover x Financial Leverage]. Discuss how
your business decisions have benefited the owners (return on equity). Has management
of your business controlled expenses (profit margin)? Have they invested in assets that
generate adequate revenue (asset turnover)? Has management used funding from
creditors to enhance the return to the stockholders (financial leverage)? ​Proceed​ with
calculating other ratios that are relevant to your company. Explain what the ratio is
telling you about your company's operations, investing or financing activities & make
salient comments about your company's business. Note: Review ratios from ACTG 11,
and see Garrison/Noreen text, page 693. ​[12 points]

net income Average total asset


Return on equity= Sales
× averageSales
total assets
× Average stockholders′ equity
74,437.20 130,680 (0+94,937.20)/2
Return on equity= 130,680
× (0+94,937.20)/2 × (0+89,437.20)/2
Return on equity= 56.96% × 2.75 × 1.06 =1.66=​166%

Overall, return on equity looks at profits relative to our stockholder. Because we


started with no stockholders equity, our average for stockholders equity was driven down.
As a result, our ROE was very high this first quarter. Our relatively high net income
shows that we managed expenses well. Again, average stockholders’ equity is low
because it our first year operating.
To further break the numbers down, our profit margin for this quarter was
56.96%. This is a really high profit margin for a company. Our profit margin is this high
because the three of us are the primary workers and we pay ourselves minimal wages to
allow our new company to have some leeway if unexpected expenses occur. That being
said, as we become more established our expenses will rise because we will most likely
pay ourselves more, hire more staff to tackle growing demand. Even with that kind of
growth on the horizon I think we will be able to absorb those costs and still have a
healthy profit margin and thus well managed expenses.
Our asset turnover is 2.75 which is a good asset turnover. For every dollar that is
spent to make money in our company we generate $2.75 of sales for our company. With
this ratio we hope that in the future it will get higher and that can be done with good
inventory management. The better we manage our assets the lower they will be, thus, if
sales stay constant or rise, we will see an increase in the asset turnover ratio. It is certain
though that this ratio will go down next quarter. Due to our business just starting, average
total assets was calculated with our starting assets, zero, and our ending assets of
$94,937.20. One of the numbers in the average being a zero bring it down quite a bit and
provides a skewed idea of what the company may look like in the future.
The state of our financial leverage is good. At 1.06 we know that our company
isn’t too reliant on debt when it comes to financing our business. It also shows that our
company as potential for strong healthy growth over the future and that we aren’t taking
advantage of profits enough when it comes to financing that growth.

Operating Expenses 6,780+4,320


Operating ratio= N et Sales
× 100 = 130,680
× 100 = 8.49
The operating ratio measures our operating expenses as a percentage of our
revenues and demonstrates our operational efficiency. The smaller the ratio, the greater
our ability is to generate profit. It demonstrates that our company is efficient with our
resources, since our result is small. With a lower cost of operating expenses, we are able
to report a lower operating ratio. It is important to keep track of this ratio to make sure we
are functioning at an efficient operation level.

Current Ratio= Current Assets


Current Liabilities
= 90,937.20
5,500
= 16.534
The Current Ratio measures the liquidity of our company and our ability to meet
our short-term obligations. Having a high ratio, indicates that we are able to pay off our
obligations better. This is important to note, since if we are ever looking to creditors to
lend money, we are in a better position to receive money from those lenders.

Selling Expense ratio = T otal Selling Expense


N et Sales
× 100 = 6,780
130,680
× 100 = 5.19%
The Selling Expense ratio measures the percent of selling expense compared to
our total sales. Having a lower percentage, indicates that we are more profitable since our
expenses are not a large factor when considering our net sales with net income.

Gross Profit Margin percentage = Gross P rof it


N et Sales
× 100 = 85,537.20
130,680
× 100 = 65.46%
The gross profit margin percentage measures how our profitable our company is
without factoring indirect costs. A higher gross profit margin, indicates that we are
making a good profit on sales, as long as we keep overhead costs low.

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