Question

Income Statement

For the Year Ended December 31, 2018

Sales                                                               $8,500,000

Manufacturing Expenses

Variable                                $3,250,000

Fixed overhead                       640,000       3,890,000

Gross Margin                                                  $4,610,000

Selling and administrative expenses

Commissions                           $580,000

Fixed marketing expenses       300,000

Fixed admin expenses               450,000      1,330,000

Net Operating Income                                     $3,280,000

Fixed Interest expenses                                       230,000    

Income before Taxes                                      $3,050,000     

Income Taxes (21%)                                            640,500

Net Income                                                     $2,409,500

Your company is considering out-sourcing the sales and marketing to an agency specializing in these types of sales. The outsourcing would remove the commissions, reduce the marketing by $270,000, and reduce the fixed administrative expenses by $35,000. The out-sourcing firm, Jangler Marketing, will charge a fee of 14% of sales. Jangler requires a 3-year contract. Jangler believes that it can increase sales by 10% for 2019 and 13% each year after (2020 and 2021). The company believes that with its current sales and marketing staff, sales will increase by 8% for 2019 and 9% in each year after (2020 and 2021).

1.Prepare contribution format projected income statements for 2019, 2020 & 202a assuming the company hires Jangler Marketing.

2.Prepare contribution format projected income statements assuming the outsourcing is rejected.

Answer 1

Solution 1:

Projected Contribution margin Income Statement - Assuming company hires Jangler Marketing
Particulars	2019	2020	2021
Sales 2019 - $8,500,000*110% 2020 - ($8,500,000*110%)*113% 2021 - ($8,500,000*110%)*113%*113%	$9,350,000	$10,565,500	$11,939,015
Variable Cost:
Variable manufacturing Expense (32.50/85*100 = 38.23529% of Sales)	$3,575,000	$4,039,750	$4,564,917
Fee of outsourcing firm (14% of Sales)	$1,309,000	$1,479,170	$1,671,462
Contribution	$4,466,000	$5,046,580	$5,702,636
Fixed Cost:
Fixed Overhead	$640,000	$640,000	$640,000
Fixed Marketing Expenses ($300,000 - $270,000)	$30,000	$30,000	$30,000
Fixed administrative Expense ($450,000 - $35,000)	$415,000	$415,000	$415,000
Earning Before Interest & Taxes (EBIT)	$3,381,000	$3,961,580	$4,617,636
Fixed Interest Expense	$230,000	$230,000	$230,000
Earning Before Taxes (EBT)	$3,151,000	$3,731,580	$4,387,636
Income Tax (21%)	$661,710	$783,632	$921,404
Net Income	$2,489,290	$2,947,949	$3,466,232

Solution 2:

Projected Contribution margin Income Statement - Assuming Outsourcing is rejected
Particulars	2019	2020	2021
Sales 2019 - $8,500,000*108% 2020 - ($8,500,000*108%)*109% 2021 - ($8,500,000*108%)*109%*109%	$9,180,000	$10,006,200	$10,906,758
Variable Cost:
Variable manufacturing Expense (32.50/85*100 = 38.23529% of Sales)	$3,510,000	$3,825,900	$4,170,231
Sales Commision (5.80/ 85*100 = 6.823529% of Sales)	$626,400	$682,776	$744,226
Contribution	$5,043,600	$5,497,524	$5,992,302
Fixed Cost:
Fixed Overhead	$640,000	$640,000	$640,000
Fixed Marketing Expenses	$300,000	$300,000	$300,000
Fixed administrative Expense	$450,000	$450,000	$450,000
Earning Before Interest & Taxes (EBIT)	$3,653,600	$4,107,524	$4,602,302
Fixed Interest Expense	$230,000	$230,000	$230,000
Earning Before Taxes (EBT)	$3,423,600	$3,877,524	$4,372,302
Income Tax (21%)	$718,956	$814,280	$918,183
Net Income	$2,704,644	$3,063,244	$3,454,118