Merline Manufacturing makes its product for $70 per unit and sells it for $138 p

Question

Merline Manufacturing makes its product for $70 per unit and sells it for $138 per unit. The sales staff receives a 10% commission on the sale of each unit. Its December income statement follows MERLINE MANUFACTURING Income Statement For Month Ended December 31, 2015 Sales Cost of goods sold $ 1,380,000 700,000 Gross profit Operating expenses 680,000 Sales commissions (10%) Advertising Store rent Administrative salaries Depreciation-Office equipment Other expenses 138,000 216,000 24,800 44,000 54,000 12,800 Total expenses 489.600 Net income $ 190,400 Management expects December's results to be repeated in January, February, and March of 2016 without any changes in strategy. Management, however, has an alternative plan. It believes that unit sales will increase at a rate of 10% each month for the next three months (beginning with January) if the items selling price is reduced to $123 per unit and advertising expenses are increased by 20% and remain at that level for all three months. The cost of its product will remain at $70 per unit, the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the same

Explanation / Answer

MERLINE MANUFACTURING

Budgeted Sales

For months of January, February and March, 2016

Note 1 - Budgeted sales quantity will increase @10% every year. In Decemeber it is 10000 units (as given in question)

Note 2 - Selling Price per Unit is expected to be $123 (Given in question)

Merlin Manufacturing

Income Statement for the months of Jan, Feb & Mar, 2016

Note 1 - Sales Commission is computed @10% of sales value

Note 2 - Advertising Expenses will be higher by 20%

January February March Budgeted Sales (in Units) 11000 12100 13310 Budgeted Selling Price per unit 123 123 123 Budgeted Sales (in dollars) 1353000 1488300 1637130

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