Question

In: Accounting

Santana Rey expects second-quarter 2020 sales of Business Solutions’s line of computer furniture to be the...

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 41 desk units (sales price of $1,260) and 21 chairs (sales price of $510).

BUSINESS SOLUTIONS—Computer Furniture Segment
Segment Income Statement*
For Quarter Ended March 31, 2020
Sales $ 187,110
Cost of goods sold 140,160
Gross profit 46,950
Expenses
Sales commissions (10%) 18,711
Advertising expenses 9,300
Other fixed expenses 18,300
Total expenses 46,311
Net income $ 639


* Reflects revenue and expense activity only related to the computer furniture segment.
† Revenue: (123 desks × $1,260) + (63 chairs × $510) = $154,980 + $32,130 = $187,110
‡ Cost of goods sold: (123 desks × $760) + (63 chairs × $260) + $30,300 = $140,160

Santana Rey believes that sales will increase each month for the next three months (April, 49 desks, 33 chairs; May, 53 desks, 36 chairs; June, 57 desks, 39 chairs) if selling prices are reduced to $1,160 for desks and $460 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 $760 for desks and $260 for chairs. The sales staff will continue to earn a 10% commission, the fixed manufacturing costs per month will remain at $10,100 and other fixed expenses will remain at $6,100 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.

Solutions

Expert Solution

1.

April May June Quarter
Sales $           72,020 $         78,040 $         84,060 $       2,34,120
COGS $           55,920 $         59,740 $         63,560 $       1,79,220
Gross Profit $           16,100 $         18,300 $         20,500 $          54,900
Expenses
Sales Commission $             7,202 $           7,804 $           8,406 $          23,412
Advertising $             3,410 $           3,410 $           3,410 $          10,230
Other Fixed Expenses $             6,100 $           6,100 $           6,100 $          18,300
Total Expenses $           16,712 $         17,314 $         17,916 $          51,942
Net Income (Loss) $               -612 $              986 $           2,584 $             2,958

2.
Rey should implement changes since it increased the income


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