Chapter 22, Problem 3APSA

Problem 22-3A

Manufacturing: Preparation and analysis of budgeted income statements

P3

Merline Manufacturing makes its product for $m 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.

MERLINE MANLWTUR1NG

Income Statement

For months Ended December 31, 2017

Sales............................ $2.250.000

Cost of goods sold............................ 1.125.000

Gross profit............................ 1.125.000

Operating expenses

Sales commissions (10%)............................ 225.000

Advertising............................ 250.000

Store rent............................ 30,000

Administrative salaries............................ 45.000

Depreciation-Office equipmen............................ 50.000

Other expenses............................ 10.000

Total expenses ............................ 610.000

Net income............................ $ 515.000

Management expects December’s results to be repeated in January, February, and March of 2018 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 1596 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.

Required

1. 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.

Check (i) Budgeted net income: January, $196,250; February, $258,125; March, $326,187

Analysis Component

2. Use the budgeted income statements from part 1 to recommend whether management should implement the proposed changes. Explain.