An analysis of Harry’s business with recommendations for improvement on the basis of an income statement under the traditional format, income statement under the contribution format, and calculated breakeven point plus desired net income will be presented in this paper.
In addition a summary of specific recommendations how to improve cash flow for Harry will be included.
The traditional method of preparing income statement as prepared in Figure I below involves the absorption costing for direct materials, direct labor, and both variable and fixed manufacturing overhead where said cost are treated as product costs and are considered as inventories and part of assets while unsold.To charge fixed overhead to product cost would increase value of ending inventory and net income as a result. This would be good if the stocks of a business are listed in the stock market since it would have big bottom line to attract investors but this is bad for tax purposes because higher income means higher taxes.
Harry must therefore use a method that will minimize tax since his business is not yet publicly listed. But since the income statement shows a loss for Harry. He must therefore increase sales and reduce cost to improve profitability.
