Income Statement by Profit Centers For the Month Ended April 30, 20 On the basis
ID: 2344358 • Letter: I
Question
Income Statement by Profit Centers For the Month Ended April 30, 20 On the basis of this information, compute the increase in monthly income from operations that maybe expected to result from each of the following actions: Spending $5:000 per month in advertising is expected to increase sales in the Equipment Sales Department by 35%. $ Closing the Equipment Sales Department and allowing the Video Rentals Department to expand is expected to increase the revenue of the Video Rentals Department by $105;000 per month. This action also is expected to increase fixed costs traceable to the Video Rentals Department by $40,000 per month. $Explanation / Answer
a. Two things to take into consideration are increase in CM from equipment sales and increase in costs. CM% for equipment sales is 29%. If sales increase by 35%, CM will increase by: 280,000*1.35*0.29 - 81,200 = 28,420, which is an increase to net income the 5000 increased costs is a decrease to net income. so net income will increase by 28,420 - 5000 = 23,420 Answer: $23,420 b. Three things to take into consideration: Increased CM from video, loss of CM from equipment, decrease in fixed costs. Lost CM from equipment of 81,200 will be a decrease to net income. CM% for video rentals is 75%. Incrase in CM from video rental = 105,000*0.75 = 78,750, which will be an increase to net income. Decrease in fixed costs of 40,000 will be an increase to net income. -81,200 + 78,750 + 40,000 = 37,550 answer: $37,550