Question

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Betty DeRose, Inc. sells three products. Income statement s for the three products for the most recent year appear below: Product #1 Product $140,000 $120,0 91,000 48,0 00 15,000 12,0 #2 Product #3 Sales revenue 00 $200,000 Costs: Variable production costs 140,000 Advertising .. 10,000 Rent ..... 00 14,000 Supervisor's salary 00 20,000 Sales commissions 00 10,000 Net income/loss. 00 6,000 00 14,000 14,0 20,000 20,0 7,000 6,0 <7,000> 20,0 The rent is allocated to the three products equally and s ales commissions are paid at a rate of 5% of sales. The company is considering eliminating Product #1. If Pro duct #1 is dropped

Answer 1

Given that,

1. The contribution margin of product #2 will increase by 15%. If contribution margin increases by 15%, Sales revenue and Variable production costs also increases by 15%. Sales revenue = $138000[120000+18000(120000*15%)]. Variable production costs = $55200[48000+7200(48000*15%)]

2. Total rent is $42000[14000*3]. Product #1 is discontinued, so rent is equally shared between two products i.e.,$21000.

3. Sales commission for product #2 changes because it is calculated on sales revenue i.e., $6900[138000*5%]

Please refer image for calculation and answer.

Betty DeRose, Inc. Income statement product #2 product #3 Particulars $138,000 $200,000 Sales Revenue Costs: Variable production costs 140,000 55,200 12,000 10,000 Advertising 21,000 21,000 Rent 20.000 20,000 Supervisor's salary Sales Commissions 6.900 10,000 Net incomel loss 22,900 (1,000) - - Total company's net income is $21,900 [22,900 - 1000] Total company's net income before doopping pooduct is $19,000 (-7000 +20,000 + 60007 ... Total company's net income is $ 2900 increased by