Question

Chap 20 Homework Merline Manufacturing makes its product for $70 per unit and sells it for $134 per unit. The sales staff receives a 10% commission on the sale of each unit. Its December income statement follows 33 34 Skloped MERLINE MANUFACTURING Income Statement For Month Ended December 31, 2019 Sales $1,340,000 Cost of goods sold 700,000 Gross profit 640,000 Operating expenses Sales commissions (10%) 134,000 Advertising 208,000 Store rent 24,400 Administrative salaries 42,000 Depreciation office equipment 52,600 Other expenses 12,400 Total expenses 472,800 Net Income $ 167,200 Book References Management expects December's results to be repeated in January, February, and March of 2020 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 $119 per unit and advertising expenses are increased by 25% 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 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 2. Is net income for March expected to increase with the proposed strategy changes? Complete this question by entering your answers in the tabs below.

Answer 1

Point to be taken care of:

• Sales unit will increase 10% each month
• advertising expense will increase by 25% only once.
• sales commission will be 10% on new sales.

Budgeted sales

	January	February	March
Budgeted sales unit	11,000($1,340,000/$134)*110%	12,100(11000*110%)	13,310 (12,100*110%)
budgeted selling price per unit	$119	$119	$119
Budgeted sales (Dollars)	$1,309,000	$1,439,900	$1,583,890

Income statement

	January	February	March
sales	$1,309,000	$1,439,900	$1,583,890
Cost of goods sold	$770,000($70*11,000)	$847,000($70*12,100)	$931,700($70*13,310)
Gross profit	$539,000($1,309,000-$770,000)	$592,900($1,439,900-$847,000)	$652,190($1,583,890-$931,700)
Expenses
Sales commissions	$130,900($1,309,000*10%)	$143,990($1,439,900*10%)	$158,389($1,583,890*10%)
Advertising	$260,000($208,000*125%)	$260,000	$260,000
Store rent	$24,400	$24,400	$24,400
Administrative salaries	$42,000	$42,000	$42,000
Depreciation -office equipment	$52,000	$52,000	$52,000
Other expenses	$12,400	$12,400	$12,400
Total expense	$521,700($130,900+$260,000+$24,400+$42,000+$52,000+$12,400)	$534,790($143,990+260,000+24,400+42,000+52,000+12,400)	$549,189($158,389+260,000+$24,400+$42,000+$52,000+$12,400)
Net Income	$17,300(539,000-521,700)	$58,110(592,900-534,790)	$103,001($652,190-$549,189)

(2) No, net income in march ($103,001) is not expected to increase as compared to December's net income which is 167,200