Question

13. Tuffet Seating Company is currently selling 2.500 oversized bean bag chairs a month at a price of $76 per chair. The variable cost of each chair sold includes $45 to purchase the bean bag chairs from suppliers and a $7 sales commission. Fixed costs are $7.000 per month. The company is considering making several operational changes and wants to know how the change will impact its operating income Read the requirements? Requirement 1. Prepare the company's current contribution margin income statement. (Use parentheses or a minus sign for an operating loss.) Tuffet Seating Company Contribution Margin Income Statement Sales revenue Variable expenses: Cost of goods sold Operating expenses Contribution margin Fixed expenses Operating income (loss) Requirement 2. Calculate the change in operating income that would result from implementing each of the following independent strategy alternatives. Compare each alternative to the current operating income as you calculated in Requirement 1. Consider each alternative separately. a. Alternative 1: The company believes volume will increase by 20% if salespeople are paid a commission of 6% of the sales price rather than the current $7 per unit. (Use parentheses or a minus sign for an operating loss) Tuffet Seating Company Contribution Margin Income Statement Sales revenue Variable expenses: Cost of goods sold Operating expenses Contribution margin Fixed expenses Operating income (loss) Operating income from implementing these changes would (1) bys from Requirement 1. b. Alternative 2: The company believes that spending an additional $6,000 on advertising would increase sales volume by 6%. (Use parentheses or a minus sign for an operating loss.)

Answer 1

Requirement 1
Tuffet Seating Company
Contribution Margin Income Statement
		$
Sales Revenue		190000
Variable Expenses
Cost of Goods sold	112500
Operating Expenses	17500	130000
Contribution Margin		60000
Fixed Expenses		7000
Operating income ( loss )		53000
* Sales Revenue = 2500 bean bag chairs * $ 76 = $ 190,000
* Cost of Goods sold = 2500 bean bag chairs * $ 45 = $ 125,000
* Operating Expenses = 2500 bean bag chairs * $ 7 = $ 17,500
Requirement 2
Alternative 1
Tuffet Seating Company
Contribution Margin Income Statement
		$
Sales Revenue		228000
Variable Expenses
Cost of Goods sold	135000
Operating Expenses	13680	148680
Contribution Margin		79320
Fixed Expenses		7000
Operating income ( loss )		72320
Operating Income from implementing theses changes would Increase by $ 19,320 from Requirement 1
New Sales units = 2,500 * 120% = 3,000 units
* Sales Revenue = ( 3000 bean bag chairs * 20% ) * $ 76 = $ 228,000
* Cost of Goods sold = 3000 bean bag chairs * $ 45 = $ 135,000
* Operating Expenses = ( 3000 bean bag chairs * $ 76 )* 6% = $ 13,680
Alternative 2
Tuffet Seating Company
Contribution Margin Income Statement
		$
Sales Revenue		201400
Variable Expenses
Cost of Goods sold	119250
Operating Expenses	18550	137800
Contribution Margin		63600
Fixed Expenses		13000
Operating income ( loss )		50600
Operating Income from implementing theses changes would Decrease by $ 2,400 from Requirement 1
New Sales units = 2,500 * 106% = 2,650 units
* Sales Revenue = 2,650 bean bag chairs * $ 76 = $ 201,400
* Cost of Goods sold = 2,650 bean bag chairs * $ 45 = $ 119,250
* Operating Expenses = 2,650 bean bag chairs * $ 7 = $ 18,550
* Fixed expenses = $ 7,000 + $ 6,000 = $ 13,000
Alternative 3
Tuffet Seating Company
Contribution Margin Income Statement
		$
Sales Revenue		192000
Variable Expenses
Cost of Goods sold	90000
Operating Expenses	14000	104000
Contribution Margin		88000
Fixed Expenses		7000
Operating income ( loss )		81000
Operating Income from implementing theses changes would Increase by $ 28,000 from Requirement 1
New Sales units = 2,500 * 80% = 2,000 units
* Sales Revenue = 2,000 bean bag chairs * $ 96 = $ 192,000
* Cost of Goods sold = 2,000 bean bag chairs * $ 45 = $ 90,000
* Operating Expenses = 2,000 bean bag chairs * $ 7 = $ 14,000
Alternative 4
Tuffet Seating Company
Contribution Margin Income Statement
		$
Sales Revenue		235850
Variable Expenses
Cost of Goods sold	143100
Operating Expenses	18550	161650
Contribution Margin		74200
Fixed Expenses		12500
Operating income ( loss )		61700
Operating Income from implementing theses changes would Increase by $ 8,700 from Requirement 1
New Sales units = 2,500 * 120% = 2,650 units
* Sales Revenue = 2,650 bean bag chairs * ($ 76+$ 13) = $ 235,850
* Cost of Goods sold = 2,650 bean bag chairs * ($ 45 + $9) = $ 143,100
* Operating Expenses = 2,650 bean bag chairs * $ 7 = $ 18,550
* Fixed expenses = $ 7,000 + $ 5,500 = $ 12,500