Question

Santana Rey expects second-quarter 2018 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, 2018 Sales† . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \(180,000 Cost of goods sold‡ . . . . . . . . . . . . . . . . . . . . . 115,000 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,000 Expenses Sales commissions (10%) . . . . . . . . . . . . . . . . 18,000 Advertising expenses . . . . . . . . . . . . . . . . . . . 9,000 Other fixed expenses . . . . . . . . . . . . . . . . . . . 18,000 Total expenses . . . . . . . . . . . . . . . . . . . . . . . . 45,000 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . \) 20,000 * 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 × \(250) + \)10,000 = \(115,000 Santana Rey believes that sales will increase each month for the next three months (April, 48 desks, 32 chairs; May, 52 desks, 35 chairs; June, 56 desks, 38 chairs) if selling prices are reduced to \)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. Use the budgeted income statements from part 1 to recommend whether Santana Rey should implement the proposed changes. Explain.

Short answer

Abudgeted income statementis the type of financial statementthat measures the firm’s intrinsic value and position in the market based on its income and expenditure.

Step-by-step solution

(1) Budgeted income statement

Business Solutions
Budgeted Income Statement
For the month of April, May and June
Particulars	April	May	June
Sales (WN-1)	$69,600	$75,550	$81,500
Cost of goods sold (WN-2)	$44,000	$47,750	$51,500
Gross profit	$25,600	$27,800	$30,000
Expenses:
Sales commission @10%	$6,960	$7,555	$8,150
Advertising	$3,300	$3,300	$3,300
Other fixed expense	$6,000	$6,000	$6,000
Total expense	$16,260	$16,855	$17,450
Net Income	$9,340	$10,945	$12,550

Working notes:

1. Calculation of sales:

Particulars	April	May	June
Desk quantity	48	52	56
Multiply: Price	$1,150	$1,150	$1,150
Desk sales value (A)	$55,200	$59,800	$64,400
Char quantity	32	35	38
Multiply: Price	$450	$450	$450
Chair sales value (B)	$14,400	$15,750	$17,100
Total sales (A+B)	$69,600	$75,550	$81,500

2.Calculation of cost of goods sold:

Particulars	April	May	June
Desk quantity	48	52	56
Multiply: Cost	$750	$750	$750
Desk COGS value (A)	$36,000	$39,000	$42,000
Char quantity	32	35	38
Multiply: Cost	$250	$250	$250
Chair COGS value (B)	$8,000	$8,750	$9,500
Total COGS (A+B)	$44,000	$47,750	$51,500

Step 2: (2) Conclusion

Yes, Santana Rey should implement the changes in the organization since it will lead to a positive income because the amount of net income will increase.