Merline Manufacturing makes its product for $70 per unit and sells it for $138 per unit. The sales staff receives a 10% commission on the sale of each unit. Its December income statement follows.
| MERLINE MANUFACTURING Income Statement For Month Ended December 31, 2015 |
||
| Sales | $ | 1,380,000 |
| Cost of goods sold | 700,000 | |
| Gross profit | 680,000 | |
| Operating expenses | ||
| Sales commissions (10%) | 138,000 | |
| Advertising | 216,000 | |
| Store rent | 24,800 | |
| Administrative salaries | 44,000 | |
| Depreciation—Office equipment | 54,000 | |
| Other expenses | 12,800 | |
| Total expenses | 489,600 | |
| Net income | $ | 190,400 |
| Management expects December’s results to be repeated in January, February, and March of 2016 without any changes in strategy. Management, however, has an alternative plan. It believes that unit sales will increase at a rate of 10% each month for the next three months (beginning with January) if the item’s selling price is reduced to $123 per unit and advertising expenses are increased by 20% and remain at that level for all three months. The cost of its product will remain at $70 per unit, the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the same. |
| Required: |
| Prepare budgeted income statements for each of the months of January, February, and March that show the expected results from implementing the proposed changes. |
Budget Sales
For months of January, February and March 2016
Budgeted sales (in units)
Budgeted sales (in units)
Budgeted sales (in dollars)
Budgeted Income Statement
January, February, and March 2016.
| Merline Manufacturing | |||
| Budgeted Income Statement | |||
| Particular | January | February | March |
| Sales Unit | 11000 | 12100 | 13310 |
| Sales Price | 123 | 123 | 123 |
| Sales | 1353000 | 1488300 | 1637130 |
| Less: | |||
| Cost of Goods sold @70 | 770000 | 847000 | 931700 |
| Gross Profit | 583000 | 641300 | 705430 |
| Operating expenses | |||
| Sales commissions (10%) | 135300 | 148830 | 163713 |
| Advertising | 259200 | 259200 | 259200 |
| Store rent | 24800 | 24800 | 24800 |
| Administrative salaries | 44000 | 44000 | 44000 |
| Depreciation—Office equipment | 54000 | 54000 | 54000 |
| Other expenses | 12800 | 12800 | 12800 |
| Total Expenses | 530100 | 543630 | 558513 |
| Net Income | 52900 | 97670 | 146917 |
Working Notes
1
Units of sales in December 2015
= 1380,000 /138
=10,000 units
We have been given that ,unit sales will increase at a rate of 10% each month for the next three months
So january sales is
=10,000+10%(10,000)
=11000
February
=11000+10%(11000)
=12100
March
=12100+(10% of 12100)
=13310
2 advertising expenses are increased by 20%
So advertising expenses
=216000+20% of 216000
=259200
