Question

Merline Manufacturing makes its product for $60 per unit and sells it for $142 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, 2017

Sales $1,420,000
Cost of goods sold 600,000
Gross profit 820,000
Operating expenses Sales commissions (10%) 142,000
Advertising 224,000
Store rent 25,200
Administrative salaries 46,000
Depreciation—Office equipment 56,000
Other expenses 13,200
Total expenses 506,400
Net income $313,600

Management expects December’s results to be repeated in January, February, and March of 2018 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 $127 per unit and advertising expenses are increased by 15% and remain at that level for all three months. The cost of its product will remain at $60 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. (Enter your final answers in whole dollars.)

Answer 1

Merline Manufacturing

MERLINE MANUFACTURING Budgeted Income Statement For Months of January, February, and March, 2017

December January February March

Sales $1,420,000 $1,397,000 $1,536,700 $1,690,370

Cost of goods sold 600,000 660,000 726,000 798,600

Gross profit 820,000 $737,000 $810,000 $891,770

Operating expenses:

Sales commissions (10%) 142,000 139,700 153,670 169,037

Advertising 224,000 257,600 257,600 257,600

Store rent 25,200 25,200 25,200 25,200

Administrative salaries 46,000 46,000 46,000 46,000

Depreciation—

Office equipment 56,000 56,000 56,000 56,000

Other expenses 13,200 13,200 13,200 13,200

Total expenses 506,400 537,700 551,670 567,037

Net income $313,600 $199,300 $258,330 $324,733

Step-by-step explanation:

a) Data:

MERLINE MANUFACTURING Income Statement For Month Ended December 31, 2017

December

Sales $1,420,000

Cost of goods sold 600,000

Gross profit 820,000

Operating expenses:

Sales commissions (10%) 142,000

Advertising 224,000

Store rent 25,200

Administrative salaries 46,000

Depreciation—Office equipment 56,000

Other expenses 13,200

Total expenses 506,400

Net income $313,600

b) Calculations:

Sales:

January = $1,420,000/$142 x 1.1 x $127 = $1,397,000

Sales unit = 11,000 (10,000 x 1.1)

February = 11,000 x 1.1 x $127 = $1,536,700

Sales unit = 12,100 (11,000 x 1.1)

March = 12,100 x 1.1 x $127 = $1,690,370

Sales unit = 13,310 12,100 x 1.1)

c) Advertising = $224,000 x 1.15 = $257,600

d) Cost of goods sold:

January = $660,000 (11,000 x $60)

February = $726,000 (12,100 x $60)

March = $798,600 (13,310 x $60)

e) Sales commission for each month is 10% of sales for the month.

f) Budgeted income statements are summaries for a period based on estimated incomes and expenses. They are useful in helping management to make projections and production decisions that will achieve desired outcomes. From these budgeted statements, management may decide to retain the December selling price and units and not increase advertising costs since the achieved net income did not improve over December's performance until March.