Acc225 Fundamental Accounting Principles: Serial Problem 23 Adriana Lopez -Budgeted Income Statement

Acc225 Fundamental Accounting Principles Serial Problem 23 (SP23) Adriana Lopez expects second quarter 2010 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 40 desk units (sales price of $1,250) and 20 chairs (sales price of $500). SUCCESS SYSTEMS Segment Income Statement* For Quarter Ended March 31, 2010 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 x $1,250) + (60 chairs x $500) = $150,000 + $30,000 = $180,000 ‡ Cost of goods sold: (120 desks x $750) + (60 chairs x $250) + $10,000 = $115,000 Lopez 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 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 Lopez should implement the proposed changes. Explain.
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