Question

Santana Rey expects second-quarter 2018 sales of her new line of computer furniture to be the same as the first quarter’s sales (reported below) without any changes in strategy. Monthly sales averaged 41 desk units (sales price of $1,260) and 21 chairs (sales price of $510).

Business Solution --Computer Furniture Segment
Segment Income Statement*
For Quarter Ended March 31, 2018
Sales†	$187,110
Cost of goods sold‡	119,960
Gross Profit	67,150
Expenses
Sales commissions (10%)	18,711
Advertising expenses	9,300
Other fixed expenses	18,300
Total Expense	46,311
Net Income	$20,839

Reflects revenue and expense activity only related to the computer furniture segment.
† Revenue: (123 desks × $1,260) + (63 chairs × $510) = $154,980 + $32,130 = $187,110
‡ Cost of goods sold: (123 desks × $760) + (63 chairs × $260) + $30,300 = $119,960

Santana Rey believes that sales will increase each month for the next three months (April, 49 desks, 33 chairs; May, 53 desks, 36 chairs; June, 57 desks, 39 chairs) if selling prices are reduced to $1,160 for desks and $460 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 $760 for desks and $260 for chairs. The sales staff will continue to earn a 10% commission, the fixed manufacturing costs per month will remain at $10,100 and other fixed expenses will remain at $6,100 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.

Business solution-- computer furniture segment
Budgeted Income Statement
For Months of April, May, and June
	April	May	June
Cost of goods sold
Sales
Gross profit
Expense
Sales commission
Advertising
Other fixed expenses
Total expenses
Net income (loss)

2. Recommend whether Santana Rey should implement the proposed changes.

a). Should implement the proposed changes.

b). Should not implement the proposed changes.

Answer 1

1.

Business solution-- computer furniture segment
Budgeted Income Statement
For Months of April, May, and June
	April	May	June
Sales	72,020	78,040	84,060
Cost of Goods Sold	55,920	59,740	63,560
Gross profit	16,100	18,300	20,500
Expense
Sales commission	7,202	7,804	8,406
Advertising	3,410	3,410	3,410
Other fixed expenses	6,100	6,100	6,100
Total expenses	16,712	17,314	17,916
Net income (loss)	$(612)	986	2,584

Note: Advertising Expense = 9,300/3 -= $3,100

increased by 10% = 3,410

Total profit for the quarter = $2,958

which is less than quarter 1 profit

2.Hence,

b). Should not implement the proposed changes.