Question

Question: HCS MFG. makes its product for \(60 per unit and sells it for \)130 per unit. The sales staff receives a commission of 10% of dollar sales. Its June income statement follows.

HCS MFG. Income Statement For Month Ended June 30, 2017
Sales	\(1,300,000
Cost of goods sold	600,000
Gross profit	700,000
Operating expenses
Sales commissions (10%)	130,000
Advertising	200,000
Store rent	24,000
Administrative salaries	40,000
Depreciation—Office equipment	50,000
Other expenses	12,000
Total expenses	456,000
Net income	\)244,000

Management expects June’s results to be repeated in July, August, and September without any changes in strategy. Management, however, has another plan. It believes that unit sales will increase at a rate of 10% each month for the next three months (beginning with July) if the item’s selling price is reduced to \(115 per unit and advertising expenses are increased by 25% and remain at that level for all three months. The cost of its product will remain at \)60 per unit, the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the same.

Required

1. Prepare budgeted income statements for each of the months of July, August, and September that show the expected results from implementing the proposed changes. Use a three-column format, with one column for each month.

Analysis Component

2. Use the budgeted income statements from part 1 to recommend whether management should implement the proposed plan. Explain.

Short answer

Answer

1. Net income for July, August, and September is $102,500,$ 150,350,and $202,985.
2. The expected results for the first three months are not encouraging.

Step-by-step solution

Meaning of Budget

Abudget is a forecasted financial strategy for the future. Management uses it as an internal tool. It is prepared for a certain period.Budgeting is the practice of planning for the future. This procedure aids managers in planning for the future and maintaining control over the organization's operations.

(1) Preparing budgeted income statement

HCS MFG. Budgeted Income Statement For the month of July, August, and September, 2017
	July	August	September
Sales	$1,265,000	$1,391,500	$1,530,650
Cost of goods sold	660,000	726,000	798,600
Gross profit	605,000	665,500	732,050
Expenses
Sales commissions (10%)	126,500	139,150	153,065
Advertising ($200,000 x 1.25)	250,000	250,000	250,000
Store rent.	24,000	24,000	24,000
Administrative salaries	40,000	40,000	40,000
Depreciation-Office equipment	50,000	50,000	50,000
Other	12,000	12,000	12,000
Total expenses	502,500	515,150	529,065
Net income	$ 102,500	$150,350	$202,985

Working notes:

Volume for the next three months increases by 10% per month

	Units (a)	Sales @ 115 (ax $115)	Cost of goods sold @80 (a x $80)
June ($1,300,000/$130)	10,000
July	11,000	$1,265,000	$660,000
August	12,100	1,391,500	726,000
September	13,310	1,530,650	798,600

(2) Analysis component

Due to the self-evident objective to extend sales volume by bringing down sales price and extending promotions, the firm will make less net income in the following three months than it did in June. The preceding three months' anticipated results are not promising. Therefore management should not implement the proposed plan.