Question

# Merline Manufacturing makes its product for \$65 per unit and sells it for \$143 per unit....

Merline Manufacturing makes its product for \$65 per unit and sells it for \$143 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 \$ 1,430,000 Cost of goods sold 650,000 Gross profit 780,000 Operating expenses Sales commissions (10%) 143,000 Advertising 226,000 Store rent 25,300 Administrative salaries 46,500 Depreciation—Office equipment 56,500 Other expenses 13,300 Total expenses 510,600 Net income \$ 269,400

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 \$128 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 \$65 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.)

SOLUTION

Budgeted sales

 Particulars January February March Budgeted sales (in units) (10000*1.10)=11,000 (11000*1.10) = 12,100 (12100*1.10) = 13,310 Budgeted selling price per unit \$128 \$128 \$128 Budgeted sales (in dollars) 1,408,000 1,548,800 1,703,680

Budgeted Income Statement

 Particulars January February March Sales 1,408,000 1,548,800 1,703,680 Cost of goods sold(units*\$65) 715,000 786,500 865,150 Gross profit 693,000 762,300 838,530 Expenses: Sales commissions (10% of sales) 140,800 154,880 170,368 Advertising (226,000*1.20) 271,200 271,200 271,200 Store rent 25,300 25,300 25,300 Administrative salaries 46,500 46,500 46,500 Depreciation-Office equipment 56,500 56,500 56,500 Other expenses 13,300 13,300 13,300 Total expenses 553,600 567,680 583,168 Net income 139,400 194,620 255,362

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