Merline Manufacturing makes its product for $75 per unit and sells it for $150 p
ID: 2475889 • Letter: M
Question
Merline Manufacturing makes its product for $75 per unit and sells it for $150 per unit. The sales staff receives a 10% commission on the sale of each unit. Its December income statement follows. 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 item's selling price is reduced to $125 per unit and advertising expenses are increased by 15% and remain at that level for all three months. The cost of its product will remain at $75 per unit, the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the same. Prepare budgeted income statements for each of the months of January, February, and March that show the expected results from implementing the proposed changes. Use a three-column format, with one column for each month. Use the budgeted income statements from part 1 to recommend whether management should implement the proposed changes. Explain.Explanation / Answer
Merline Manufacturing Budgeted Income Statement For Month Ended December 31, 2015 Per Unit January February March Sales 125 2062500 ( 15000*110%*125) 2268750 ( 15000*110%*110%*125) 2495625 ( 15000*110%*110%*110%*125) Cost of Goods sold 75 1237500 ( 15000*110%*75) 1361250 ( 15000*110%*110%*75) 1497375 ( 15000*110%*110%*110%*75) Gross Profit 825000 907500 998250 Sales Commission 206250 226875 249562.5 Advertising 287500 287500 287500 Store Rent 30000 30000 30000 Salaries 45000 45000 45000 Depreciation 50000 50000 50000 Other Expenses 10000 10000 10000 Total Expenses 628750 649375 672062.5 Net Income 196250 258125 326187.5 No the management should not implement the changes as the net income is decreased as compared to December Income