Merline Manufacturing makes its product for $70 per unit and sells it for $138 p
ID: 2476834 • Letter: M
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.
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 $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.
Prepare budgeted income statements for each of the months of January, February, and March that show the expected results from implementing the proposed changes.
Budget Sales
For months of January, February and March 2016
Budgeted sales (in units)
Budgeted sales (in units)
Budgeted sales (in dollars)
Budgeted Income Statement
January, February, and March 2016.
MERLINE MANUFACTURINGIncome Statement
For Month Ended December 31, 2015 Sales $ 1,380,000 Cost of goods sold 700,000 Gross profit 680,000 Operating expenses Sales commissions (10%) 138,000 Advertising 216,000 Store rent 24,800 Administrative salaries 44,000 Depreciation—Office equipment 54,000 Other expenses 12,800 Total expenses 489,600 Net income $ 190,400
Explanation / Answer
Working Notes
1
Units of sales in December 2015
= 1380,000 /138
=10,000 units
We have been given that ,unit sales will increase at a rate of 10% each month for the next three months
So january sales is
=10,000+10%(10,000)
=11000
February
=11000+10%(11000)
=12100
March
=12100+(10% of 12100)
=13310
2 advertising expenses are increased by 20%
So advertising expenses
=216000+20% of 216000
=259200
Merline Manufacturing Budgeted Income Statement Particular January February March Sales Unit 11000 12100 13310 Sales Price 123 123 123 Sales 1353000 1488300 1637130 Less: Cost of Goods sold @70 770000 847000 931700 Gross Profit 583000 641300 705430 Operating expenses Sales commissions (10%) 135300 148830 163713 Advertising 259200 259200 259200 Store rent 24800 24800 24800 Administrative salaries 44000 44000 44000 Depreciation—Office equipment 54000 54000 54000 Other expenses 12800 12800 12800 Total Expenses 530100 543630 558513 Net Income 52900 97670 146917