Question

Santana Rey expects second-quarter 2020 sales of Business Solutions's line of computer furniture to be the same as the first quarter's sales (reported below) without any changes in strategy. Monthly sales averaged 38 desk units (sales price of $1,180) and 13 chairs (sales price of $430). BUSINESS SOLUTIONS-Computer Furniture Segment Segment Income Statement For Quarter Ended March 31, 2020 Sales $ 151,290 Cost of goods sold 112,440 Gross profit 38,850 Expenses Sales commissions (10%) 15,129 Advertising expenses 6,900 Other fixed expenses 15,900 Total expenses 37,929 Net income $ 921 * Reflects revenue and expense activity only related to the computer furniture segment. Revenue: (114 desks * $1,180) + (39 chairs * $430) = $134,520 + $16,770 = $151,290 Cost of goods sold: (114 desks * $680) + (39 chairs * $180) + $ 27,900 = $112,440 Santana Rey believes that sales will increase each month for the next three months (April, 46 desks, 25 chairs; May, 50 desks, 28 chairs, June, 54 desks, 31 chairs) if selling prices are reduced to $1,050 for desks and $380 for chairs and advertising expenses are increased by 10% and remain at that level for all three months. The products' variable cost will remain at $680 for desks and $180 for chairs. The sales staff will continue to earn a 10% commission, the fixed manufacturing costs per month will remain at $9,300 and other fixed expenses will remain at $5,300 per month. Required: 1. Prepare budgeted income statements for the computer furniture segment for each of the months of April, May, and June that show the expected results from implementing the proposed changes. Use a three-column format, with one column for each month. 2. Recommend whether Santana Rey should implement the proposed changes.

Answer 1

1.

BUSINESS SOLUTIONS-COMPUTER FURNITURE SEGMENT
Budgeted Income Statements
For Months of April, May, and June
	April	May	June
Sales	57800	63140	68480
Cost of goods sold	45080	48340	51600
Gross profit	12720	14800	16880
Expenses
Sales commissions	5780	6314	6848
Advertising	2530	2530	2530
Other fixed expenses	5300	5300	5300
Total expenses	13610	14144	14678
Net income (loss)	-890	656	2202

Working:

Sales:

	April		May		June
	Desks	Chairs	Desks	Chairs	Desks	Chairs
Units sold	46	25	50	28	54	31
x Selling price per unit	1050	380	1050	380	1050	380
Sales revenue $	48300	9500	52500	10640	56700	11780
Total sales for the month $	57800		63140		68480

Cost of goods sold:

	April		May		June
	Desks	Chairs	Desks	Chairs	Desks	Chairs
Units sold	46	25	50	28	54	31
x Variable cost per unit	680	180	680	180	680	180
Variable cost $	31280	4500	34000	5040	36720	5580
Variable cost for the month	35780		39040		42300
Fixed cost $	9300		9300		9300
Total cost of goods sold $	45080		48340		51600

Monthly advertising expense = ($6900 x 1.10)/3 = $7590/3 = $2530

2. Yes

The proposed changes should be implemented since it would result in a higher net income for the quarter of $1968 as against $921.