Question

Diversified Industries manufactures sump-pumps. Its most popular product is called the Super Soaker, which has a retail price of \(1,200 and costs \)540 to manufacture. It sells the Super Soaker on a standalone basis directly to businesses. Diversified also provides installation services for these commercial customers, who want an emergency pumping capability (with regular and back-up generator power) at their businesses. Diversified also distributes the Super Soaker through a consignment agreement with Menards. Income data for the first quarter of 2017 from operations other than the Super Soaker are as follows.

Revenues: \(9,500,000

Expenses: \)7,750,000

Diversified has the following information related to two Super Soaker revenue arrangements during the first quarter of 2017.

1. Diversified sells 30 Super Soakers to businesses in flood-prone areas for a total contract price of \(54,600. In addition to the pumps, Diversified also provides installation (at a cost of \)150 per pump). On a standalone basis, the fair value of this service is \(200 per unit installed. The contract payment also includes a \)10 per month service plan for the pumps for 3 years after installation (Diversified’s cost to provide this service is \(7 per month). The Super Soakers are delivered and installed on March 1, 2017, and full payment is made to Diversified. Any discount is applied to the pump/installation bundle.

2. Diversified ships 300 Super Soakers to Menards on consignment. By March 31, 2017, Menards has sold two-thirds of the consigned merchandise at the listed price of \)1,200 per unit. Menards notifies Diversified of the sales, retains a 5% commission, and remits the cash due Diversified.

Accounting

Determine Diversified Industries’ 2017 first-quarter net income. (Ignore taxes.)

Short answer

Net income for the first-quarter total $1,894,000.

Step-by-step solution

Definition of Net Income

Net income can be defined as the aggregate benefits generated by the business entity after adjusting for the sacrifices made. It includes the adjustment for interest and tax expenses.

Calculation of net income for the first quarter

Particular	Amount $
Sales revenue	$9,500,000
Less: Expenses	($7,750,000)
	$1,750,000
Add: Net income from Pump Bundle	$24,000
Add: Net income from consignment sale	$120,000
Net income	$1,894,000

Working note:

1. Calculation of net income from Pump Bundle

Particular	Amount $
Sales revenue	$43,800
Less: Cost of goods sold	($20,700)
Gross profit	$23,100
Sales revenue	$3,000
Less: Cost of goods sold	($2,100)
Gross profit	$900
Net income	$24,000

Calculation of Profit from consignment sale:

Particular	Amount $
Sales revenue	$240,000
Less: Cost of goods sold	($108,000)
	$132,000
Less: Commission to consignment	($12,000)
Net income	$120,000

Allocation of Contract price:

Particular	Amount $
Total contract price	$54,600
Less: Allocated to Service contract charge @ $10 per month for 30 soakers for 36 months	($10,800)
Allocated to pump bundle	$43,800