Question

Stratford Company distributes a lightweight lawn chair that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $200,000 annually.

.	Refer to the original data. Assume that the company sold 40,500 units last year. The sales manager is convinced that a 12% reduction in the selling price, combined with a $63,000 increase in advertising expenditures, would increase annual unit sales by 50%.

a.

Prepare two contribution format income statements, one showing the results of last year’s operations and one showing what the results of operations would be if these changes were made. (Do not round intermediate calculations. Round your "Per unit" answers to 2 decimal places.) Stratford Company Contribution Margin Income Statement Last Year Proposed 60,750 units 40,500 units Total Per Unit Total Per Unit $ 3,240,000 S Sales Variable expenses Contribution margin Fixed expenses Net operating income 1,420,000 1,620,000 1,620,000 200,000 80.00 40.00 40.00 0.00 Net operating inco 420000

I am just missing the second part I cant figure it out in the chart.

6.

Refer to the original data. Assume again that the company sold 40,500 units last year. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by $2.40 per unit. He thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach. *The amount by which advertising can be increased is:

Answer 1

33 Answer: 34 Prepare two contribution format income statements, one showing the results of last year's operations and one 35 showing what the results of operations would be if these changes were made 36 S Company Contribution Margin Income Statement 38 39 40 41 42 Sales 43 Variable expenses 44 Contribution margin 45 Fixed expenses 46 Net operating income Last Year Proposed 40,500 Units 60,750 Units Particulars Total Per unit Total Per unit S4,276,800 $2,430,000 S40.00 S1,846,800 $263,000 S1,583,800 S70.40 $40.00 S30.40 $80.00 S40.00 S3,240,000 $1,620,000 S1,620,000 $200,000 $1,420,000 48 Would you recommend that the company do as the sales manager suggests? 49 Yes, Because net operating income increased 50 51 6. The amount by which advertising can be increased is 52 53 54 Selling price S80.00 Fixed expenses S200,000 +X Variable cost (S40 +S2.40) S42.40 Sales unit (40,500 2) 81000 56 Sales 57 Less: Variable expenses 58 Contribution margin 59 Total contribution (81,000 S37.60)- 60 Operating income S3,045,600-S200,000-X-S1,420,000 61 $80.00 $42.40 S37.60 $3,045,600 X- S3.045,600-S200.000-S1,420,000 The amount by which advertising can be increased is/$1,425,600 62

Working note:

33 Answer: 34 Prepare two contribution format income statements, one showing the results of last year's operations and one 35 showing what the results of operations would be if these changes were made 36 37 38 39 40 41 42 Sales 43 Variable expenses 44 Contribution margin 45 Fixed expenses 46 Net operating income 47 48 Would you recommend that the company do as the sales manager suggests? 49 Yes, Because net operating income increased 50 51 6. The amount by which advertising can be increased is 52 53 54 S Company Contribution Margin Income Statement Last Year Proposed Units -B40-15000 Per unit Units Per unit 80*(100-12) 40500 Particulars Total Total B40 80 B40*40 B42-B43 80 40 D40 E42 D40 E43 -C42-C43 D42-D43 40 E42-E43 00000+63000 D44-D45 B44-B45 Selling price 80 Fixed expenses S200,000 +X Variable cost (S40 +S2.40) 40+2.4 Sales unit (40.5002405002 56 Sales 57 Less: Variable expenses 58 Contribution margin 59 Total contribution (81.000*S37.60) 81000 B58 60 Operating income - S3,045,600-S200,000-X-S1,420,000 61 80 B56-B57 X- S3,045.600-S200.000-S1,420,000 The amount by which advertising 62 can be increased is 3045600-200000-1420000