Question

Santana Rey expects second-quarter 2020 sales of Business Solutions’s line of computer furniture to be the same as the first quarter’s sales (reported below) without any changes in strategy. Monthly sales averaged 40 desk units (sales price of $1,250) and 20 chairs (sales price of $500).

BUSINESS SOLUTIONS—Computer Furniture Segment
Segment Income Statement*
For Quarter Ended March 31, 2020
Sales†	$	180,000
Cost of goods sold‡		135,000
Gross profit		45,000
Expenses
Sales commissions (10%)		18,000
Advertising expenses		9,000
Other fixed expenses		18,000
Total expenses		45,000
Net income	$	0

* Reflects revenue and expense activity only related to the computer furniture segment.
† Revenue: (120 desks × $1,250) + (60 chairs × $500) = $150,000 + $30,000 = $180,000
‡ Cost of goods sold: (120 desks × $750) + (60 chairs × $250) + $30,000 = $135,000

Santana Rey believes that sales will increase each month for the next three months (April, 48 desks, 32 chairs; May, 52 desks, 35 chairs; June, 56 desks, 38 chairs) if selling prices are reduced to $1,150 for desks and $450 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 $750 for desks and $250 for chairs. The sales staff will continue to earn a 10% commission, the fixed manufacturing costs per month will remain at $10,000, and other fixed expenses will remain at $6,000 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.
2. Recommend whether Santana Rey should implement the proposed changes.

Answer 1

Budgeted income statements
for the month of april may june
	april	may	june
Revenue (A)	69600	75550	81500
	48*1150+32*450	52*1150+35*450	56*1150+38*450
cost of goods sold (B)	54000	57750	61500
	48*750+32*250+10000	52*750+35*250+10000	56*750+38*250+10000
Gross profit (A)-(B)	15600	17800	20000
expenses:
sale commission (A)*10%	6960	7555	8150
advertising expenses	3300	3300	3300
other fixed expenses	6000	6000	6000
Total fixed expenses	16260	16855	17450
Net income	-660	945	2550
2) Should not implement proposed changes

Advertising expenses = 9000/3*1.10

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