Chapter 22, Problem 22SP

To determine

Concept Introduction:

Budgeted Income statement can be defined as the income statement prepared for a future period in order to estimate the budgeted expenses and budgeted revenues, thus budgeted income or loss can be predicted. It is like setting a standard for actual income statement. So that, on a later stage the deviations can be calculated.

Budgeted income statement can also be prepared to know the results of the changes if a business opts for those changes in revenues or costs etc.

Requirement 1

To prepare:

Budgeted Income statement for the computer furniture segment for the month of April, May and June.

Answer to Problem 22SP

Solution:

BUSINESS SOLUTIONS - Computer Furniture Segment
Budgeted Segment Income Statement
For the Quarter ended on Jun 30, 2018
	April	May	June
Sales	69,600	75,550	81,500
Cost of Goods sold	44,000	47,750	51,500
Gross profit	25,600	27,800	30,000
Expenses
Sales commission	6,960	7,555	8,150
Advertising expenses	3,300	3,300	3,300
Total fixed expenses	16,000	16,000	16,000
Total expenses	26,260	26,855	27,450
Net Income	-660	945	2,550

Explanation of Solution

The budgeted income statement is prepared as under –

1. The sales are calculated –

April
	Units sold	Per unit sale price	Total
Desks	48	1,150	55,200
Chairs	32	450	14,400
Total sales			69,600
May
	Units sold	Per unit sale price	Total
Desks	52	1,150	59,800
Chairs	35	450	15,750
Total sales			75,550
June
	Units sold	Per unit sale price	Total
Desks	56	1,150	64,400
Chairs	38	450	17,100
Total sales			81,500

This is how sales are calculated.

2. Cost of goods sold

April
	Units sold	Per unit Cost of goods sold	Total
Desks	48	750	36,000
Chairs	32	250	8,000
Total sales			44,000
May
	Units sold	Per unit Cost of goods sold	Total
Desks	52	750	39,000
Chairs	35	250	8,750
Total sales			47,750
June
	Units sold	Per unit Cost of goods sold	Total
Desks	56	750	42,000
Chairs	38	250	9,500
Total sales			51,500

3. Gross profit is calculated as using the formula

$Grossprofit=Sales–CostofGoodssold$

4. Sale commissions are 10 % of the sales.

Thus, the sales commission for the Quarter is –

	April	May	June
Sales (1)	69,600	75,550	81,500
Sales commission on sales (2)	10%	10%	10%
Amount of sales commission (1) X (2)	6,960	7,555	8,150

5. Advertising expenses are same for all the months but increases by 10 %.

Advertising expenses are calculated as under –

$\begin{array}{l}PerMonthadvertisingexpense=\frac{Total\text{ advertising }expenseforthreemonths}{3}\\ PerMonthadvertisingexpense=\frac{\$9,000}{3}\\ PerMonthadvertisingexpense\text{ = \$ 3,000}\\ IncreaseinAdverti\sin g\exp ense=10\%X\$3,000\\ IncreaseinAdverti\sin g\exp ense=\$300\\ IncreasedAdverti\sin g\exp ense=\$3,000+\$300\\ IncreasedAdverti\sin g\exp ence=\$3,300\end{array}$

6. The fixed expenses are given as fixed manufacturing costs per month = $ 10,000 and other fixed expenses = $ 6,000 amounting to total fixed expenses = $ 16,000.

7. The net income is calculated as using the formula –

$Netincome=Grossprofit–Totalexpenses$

In this way, the budgeted income statement for the three months have been prepared.

Conclusion

Thus, the budgeted income statement has been prepared for the quarter.

To determine

Requirement 2

To determine:

Whether Sanatana Rey should implement the proposed changes or not.

Answer to Problem 22SP

Solution:

No, Sanatana Rey should not implement the proposed changes.

Explanation of Solution

This can be explained as even after increase in the quantities in the desks and chair, the total net income for the quarter was less than the net income for the first quarter.

The net income for the first quarter was $ 20,000 while for the quarter it was = $ 2,835 (-$ 660 + $ 945 + $ 2,550).

The net income was very less when compared. Implementing proposed changes will not be a very good decision.

Conclusion

Thus, Sanatana Rey should not implement the proposed changes.