Reference no: EM131831547
Problem - Santana Rey expects second quarter 2012 sales of her new line of computer furniture to be the same as the first quarter's sales (reported below) without any changes in strategy. Monthly sales averaged 44 desk units (sales price of $1,300) and 25 chairs (sales price of $550).
Sales† $ 212,850
Cost of goods sold‡ $ 159,600
Gross profit 53,250
Expenses
Sales commissions (10%) 21,285
Advertising expenses 10,500
Other fixed expenses 19,500
Total expenses $ 51,285
Net income $ 1,965
Reflects revenue and expense activity only related to the computer furniture segment.
† Revenue: (132 desks × $1,300) + (75 chairs × $550) = $171,600 + $41,250 = $212,850
‡ Cost of goods sold: (132 desks × $800) + (75 chairs × $300) + $31,500 = $159,600
Santana Rey believes that sales will increase each month for the next three months (April, 52 desks, 37 chairs; May, 56 desks, 40 chairs; June, 60 desks, 43 chairs) if selling prices are reduced to $1,200 for desks and $500 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 $800 for desks and $300 for chairs. The sales staff will continue to earn a 10% commission, the fixed manufacturing costs per month will remain at $10,500 and other fixed expenses will remain at $6,500 per month.
Required:
1. Prepare budgeted income statements 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.