Question

Santana Rey expects second-quarter 2020 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 42 desk units (sales price of $1,270) and 22 chairs (sales price of $520).

BUSINESS SOLUTIONS—Computer Furniture Segment
Segment Income Statement*
For Quarter Ended March 31, 2020
Sales†	$	194,340
Cost of goods sold‡		145,440
Gross profit		48,900
Expenses
Sales commissions (10%)		19,434
Advertising expenses		9,600
Other fixed expenses		18,600
Total expenses		47,634
Net income	$	1,266

* Reflects revenue and expense activity only related to the computer furniture segment.
† Revenue: (126 desks × $1,270) + (66 chairs × $520) = $160,020 + $34,320 = $194,340
‡ Cost of goods sold: (126 desks × $770) + (66 chairs × $270) + $30,600 = $145,440

Santana Rey believes that sales will increase each month for the next three months (April, 50 desks, 34 chairs; May, 54 desks, 37 chairs; June, 58 desks, 40 chairs) if selling prices are reduced to $1,170 for desks and $470 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 $770 for desks and $270 for chairs. The sales staff will continue to earn a 10% commission, the fixed manufacturing costs per month will remain at $10,200 and other fixed expenses will remain at $6,200 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. Recommend whether Santana Rey should implement the proposed changes.

Answer 1

	Santana Rey
1	Budgeted Income Statement for the Computer Furniture Segment (Q2, 2020)
			April	May	June	Total
	No. of Desk to be Sold	a	50	54	58	162
	No. of Chairs to be Sold	b	34	37	40	111
	Selling Price for Desk	c	$          1,170.00	$      1,170.00	$    1,170.00
	Selling Price for Chair	d	$             470.00	$          470.00	$        470.00
	Variable cost for Desk	e	$             770.00	$          770.00	$        770.00
	Variable cost for Chair	f	$             270.00	$          270.00	$        270.00
	Sales revenue
	Desk	g=a*c	$       58,500.00	$    63,180.00	$ 67,860.00	$ 189,540.00
	Chair	h=b*d	$       15,980.00	$    17,390.00	$ 18,800.00	$    52,170.00
	Total Sales	i=g+h	$       74,480.00	$    80,570.00	$ 86,660.00	$ 241,710.00
	Cost of good sold
	Variable cost for Desk	j=a*e	$             38,500	$          41,580	$        44,660	$        124,740
	Variable cost for Chair	k=b*f	$                9,180	$            9,990	$        10,800	$          29,970
	Fixed manufacturing cost	l	$             10,200	$          10,200	$        10,200	$          30,600
	Total Cost of goods sold	m=j+k+l	$             57,880	$          61,770	$        65,660	$        185,310
	Gross Profit	n=i-m	$             16,600	$          18,800	$        21,000	$          56,400
	Expenses
	Sales Commision	o=i*10%	$          7,448.00	$      8,057.00	$    8,666.00	$    24,171.00
	Advertisement expense ($9600+10% of 9600)	p	$             10,560	$          10,560	$        10,560	$    31,680.00
	Other Fixed expenses	q	$                6,200	$            6,200	$          6,200	$    18,600.00
	Total Expenses	r=o+p+q	$             24,208	$          24,817	$        25,426	$          74,451
	Net Income/(Loss)	s=n-r	$             (7,608)	$          (6,017)	$        (4,426)	$        (18,051)
2	Santana Rey should not implement the proposed change as it will results into Net loss of $18,051 in the 2nd Quarter.

Please do upvote if you found the answer useful.

Feel free to reach in the comment section in case of any clarification or queries.