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 39 desk units (sales price of $1,200) and 15 chairs (sales price of $450).

BUSINESS SOLUTIONS—Computer Furniture Segment
Segment Income Statement*
For Quarter Ended March 31, 2020
Sales†	$	160,650
Cost of goods sold‡		119,400
Gross profit		41,250
Expenses
Sales commissions (10%)		16,065
Advertising expenses		7,500
Other fixed expenses		16,500
Total expenses		40,065
Net income	$	1,185

* Reflects revenue and expense activity only related to the computer furniture segment.
† Revenue: (117 desks × $1,200) + (45 chairs × $450) = $140,400 + $20,250 = $160,650
‡ Cost of goods sold: (117 desks × $700) + (45 chairs × $200) + $28,500 = $119,400

Santana Rey believes that sales will increase each month for the next three months (April, 47 desks, 27 chairs; May, 51 desks, 30 chairs; June, 55 desks, 33 chairs) if selling prices are reduced to $1,080 for desks and $400 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 $700 for desks and $200 for chairs. The sales staff will continue to earn a 10% commission, the fixed manufacturing costs per month will remain at $9,500 and other fixed expenses will remain at $5,500 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 should implement the proposed changes. Hint: Compare quarterly income for the proposed April-May-June period to the quarterly income for the January-February-March period.

Answer 1

a)Budgeted income statements for the computer furniture segment for each of the months of April, May, and June

Budgeted Income Statement
Particulars	April	May	June	Quarterly
Sales	61560	67080	72600	201240
Cost of goods Sold	-38300	-41700	-45100	-125100
Gross Profit	23260	25380	27500	76140
Expenses
Sales Commission(10% of sales)	6156	6708	7260	20124
Advertisement Expenses(7500+0.10*7500)/3	2750	2750	2750	8250
Other Fixed Expenses(9500+5500)	15000	15000	15000	45000
Total Expenses	23906	24458	25010	73374
Net Income	-646	922	2490	2766

Note:

revenue and expense activity only related to the computer furniture segment.

April
† Revenue: (47 desks × $1,080) + (27 chairs × $400) = $50760 + $10800 = $61560
‡ Cost of goods sold: (47 desks × $700) + (27 chairs × $200)=$32900 + $5,400 = $38,300

May
† Revenue: (51 desks × $1,080) + (30 chairs × $400) = $55080 + $12000 = $67080
‡ Cost of goods sold: (51 desks × $700) + (30 chairs × $200)=$35700 + $6000 = $41,700

June
† Revenue: (55 desks × $1,080) + (33 chairs × $400) = $59400 + $13200 = $72600
‡ Cost of goods sold: (55 desks × $700) + (33 chairs × $200)=$38500 + $6600 = $45,100

b)Yes, Sanatana should implement the changes as net profit increased by $1581 (2766-1185) when compared with quaterly profit of March quarter. So the proposed changes should be implemented.