Question

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.

(Please show how you got each answer)

Answer 1

	Sales
	Gross Margin	$4,610,000
	Add: Manufacturing expenses	3,890,000
	Sales	$8,500,000
	Variable manufacturing expenses %	38.2353%
	(3250000 ÷ 8500000)
	Commission %	6.8235%
	(580000 ÷ 8500000)
1	Contribution Format Income Statement(Hires Jangler)
			10% Increase	13% Increase	13% Increase
		%	2019	2020	2021
	Sales (8500000 x 110%)		$        9,350,000	$        10,565,500	11,939,015
	Less: Variable manufacturing expenses	38.2353%	3,575,000	4,039,750	4,564,917.50
	Sales Commission (14% of sales)		$ 1,309,000.00	$    1,479,170.00	$ 1,671,462.10
	Contribution Margin		4,466,000.00	5,046,580.00	5,702,635.40
	Less: Fixed Expenses:
	Fixed Overhead		640,000	640,000	640,000
	Fixed marketing expenses(300000-270000)		30,000	30,000	30,000
	Fixed Admin Expenses (450000-35000)		415,000	415,000	415,000
	Fixed Interest expenses		230,000	230,000	230,000
	Total Fixed Expenses		$        1,315,000	$          1,315,000	$        1,315,000
	Earning before taxes		$ 3,151,000.00	$    3,731,580.00	$ 4,387,635.40
	Less: Tax at 21%		661,710.00	783,631.80	921,403.43
	Net Income		2,489,290.00	2,947,948.20	3,466,231.97
2	Contribution Format Income Statement(Outsourcing Rejected)
			8% Increase	9% Increase	9% Increase
		%	2019	2020	2021
	Sales (8500000 x 108%)		$        9,180,000	$        10,006,200	10,906,758
	Less: Variable manufacturing expenses	38.2353%	3,510,000	3,825,900	4,170,231.00
	Commission	6.8235%	$      626,400.00	$        682,776.00	$      744,225.84
	Contribution Margin		5,043,600.00	5,497,524.00	5,992,301.16
	Less: Fixed Expenses:
	Fixed Overhead		640,000	640,000	640,000
	Fixed marketing expenses		300,000	300,000	300,000
	Fixed Admin Expenses		450,000	450,000	450,000
	Fixed Interest expenses		230,000	230,000	230,000
	Total Fixed Expenses		$        1,620,000	$          1,620,000	$        1,620,000
	Earning before taxes		$ 3,423,600.00	$    3,877,524.00	$ 4,372,301.16
	Less: Tax at 21%		718,956.00	814,280.04	918,183.24
	Net Income		2,704,644.00	3,063,243.96	3,454,117.92
Note: Since in 2019 and 2020 net income is hire under self marketing staff and also in 2021 only small difference,
Outsourcing is not recommended.