Perkins Company buys one kind of graduation ring at $64 per unit and sells it at $120 per unit. The company's

Question

sales representatives receive an 8% commission on each sale. The December income statement shows the following information:

Sales $1,200,000-
Cost of goods sold $640,000 =
Gross profit $560,000
Expenses:
Sales commissions $96,000 +
Advertising160,000+
Store rent24,000+
Administrative salaries40,000+
Amortization50,000+
Other12,000=
Total382,000
Net income178,000

The company's management believes that the December results would be repeated during January, February, and March without any changes in strategy. However, some changes are being considered. Management believes that unit sales will increase at a rate of 10% each month during the next quarter (including January) if the item's selling price is reduced to $112 per unit and if advertising expenses are increased by 25% and remain at that level for all three months. Even if these changes are made, the purchase price will remain at $64 per unit. Under this plan, the sales representatives would continue to earn a 8%

commission and the remaining expenses would remain unchanged.

Required
Using a three-column format, prepare budgeted income statements for January, February, and March that show the expected results of implementing the proposed changes. Based on the information in the budgeted income statements, recommend whether management should implement the plan.

Answer 1

Under the proposed strategy, net income for Jan, Feb and Mar will be $103,440, $146,384 and $193,622 respectively giving a total of $443,446. If the strategy isn't changed and Dec's results are repeated for Jan to Mar, the 3-mths' total net income will be $178,000 x 3 = $534,000. On this basis, it would appear better not to change things. The Excel file will be emailed to you.