Income Statement For the Year Ended December 31, 2018 Sales $8,500,000 Manufactu
ID: 2610736 • Letter: I
Question
Income Statement
For the Year Ended December 31, 2018
Sales $8,500,000
Manufacturing Expenses
Variable $3,250,000
Fixed overhead 640,000 3,890,000
Gross Margin $4,610,000
Selling and administrative expenses
Commissions $580,000
Fixed marketing expenses 300,000
Fixed admin expenses 450,000 1,330,000
Net Operating Income $3,280,000
Fixed Interest expenses 230,000
Income before Taxes $3,050,000
Income Taxes (21%) 640,500
Net Income $2,409,500
Your company is considering out-sourcing the sales and marketing to an agency specializing in these types of sales. The outsourcing would remove the commissions, reduce the marketing by $270,000, and reduce the fixed administrative expenses by $35,000. The out-sourcing firm, Jangler Marketing, will charge a fee of 14% of sales. Jangler requires a 3-year contract. Jangler believes that it can increase sales by 10% for 2019 and 13% each year after (2020 and 2021). The company believes that with its current sales and marketing staff, sales will increase by 8% for 2019 and 9% in each year after (2020 and 2021).
1.Prepare contribution format projected income statements for 2019, 2020 & 202a assuming the company hires Jangler Marketing.
2.Prepare contribution format projected income statements assuming the outsourcing is rejected.
Explanation / Answer
Solution 1:
Solution 2:
Projected Contribution margin Income Statement - Assuming company hires Jangler Marketing Particulars 2019 2020 2021 Sales2019 - $8,500,000*110%
2020 - ($8,500,000*110%)*113%
2021 - ($8,500,000*110%)*113%*113% $9,350,000 $10,565,500 $11,939,015 Variable Cost: Variable manufacturing Expense (32.50/85*100 = 38.23529% of Sales) $3,575,000 $4,039,750 $4,564,917 Fee of outsourcing firm (14% of Sales) $1,309,000 $1,479,170 $1,671,462 Contribution $4,466,000 $5,046,580 $5,702,636 Fixed Cost: Fixed Overhead $640,000 $640,000 $640,000 Fixed Marketing Expenses ($300,000 - $270,000) $30,000 $30,000 $30,000 Fixed administrative Expense ($450,000 - $35,000) $415,000 $415,000 $415,000 Earning Before Interest & Taxes (EBIT) $3,381,000 $3,961,580 $4,617,636 Fixed Interest Expense $230,000 $230,000 $230,000 Earning Before Taxes (EBT) $3,151,000 $3,731,580 $4,387,636 Income Tax (21%) $661,710 $783,632 $921,404 Net Income $2,489,290 $2,947,949 $3,466,232