Question

Lilliput, a one-product mail-order firm, buys its product for $55 per unit and sells it for $153 per unit. The sales staff receives a 10% commission on the sale of each unit. Its December income statement follows.

  

LILLIPUT COMPANY Income Statement For The Month Ended December 31, 2011
Sales	$	1,530,000
Cost of goods sold		550,000
Gross profit		980,000
Expenses
Sales commissions (10%)		153,000
Advertising		246,000
Store rent		26,300
Administrative salaries		51,500
Depreciation		61,500
Other expenses		14,300
Total expenses		552,600
Net profit	$	427,400

  

Management expects December’s results to be repeated in January, February, and March of 2012 without any changes in strategy. Management, however, has an alternative plan. It believes that unit sales will increase at a rate of 10% each month for the next three months (beginning with January) if the item's selling price is reduced to $138 per unit and advertising expenses are increased by 20% and remain at that level for all three months. The cost of its product will remain at $55 per unit, the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the same.

  

Required:

1.	Prepare budgeted income statements for each of the months of January, February, and March that show the expected results from implementing the proposed changes. (Input all amounts as positive values. Omit the "$" sign in your response.)

  

LILLIPUT COMPANY Budgeted Income Statement For Months of January, February, and March
	January	February	March
(Click to select)SalesSales commissionsDepreciationInterest expenseAdvertising	$	$	$
(Click to select)DepreciationAdvertisingInterest expenseCost of goods soldSales commissions
(Click to select)Gross lossGross profit
Expenses
(Click to select)SalesCost of goods soldInterest expenseRent expenseSales commissions
(Click to select)Rent expenseCost of goods soldAdvertisingSalesInterest expense
(Click to select)Utilities expenseSalesStore rentCost of goods soldInterest expense
(Click to select)Interest expenseAdministrative salariesSalesRent expenseCost of goods sold
(Click to select)Interest expenseSalesCost of goods soldDepreciationRent expense
(Click to select)Other expensesCost of goods soldInterest expenseRent expenseSales
Total expenses
(Click to select)Net profitNet loss	$	$	$

Answer 1

	LILLIPUT COMPANY
	Income Statement
	For The Month Ended December 31, 2011		PU Cost	Units
	Sales	1530000	153.00	10000	1530000/153
	Cost of goods sold	550000	55.00	10000	10000*55
	Gross profit	980000	98.00
	Expenses:
	Sales commissions (10%)	153000	15.30		153*10%
	Advertising	246000	Fixed
	Store rent	26,300	Fixed
	Administrative salaries	51500	Fixed
	Depreciation	61500	Fixed
	Other expenses	14300	Fixed
	Total expenses	552600
	Net profit	427400
	LILLIPUT COMPANY
	Budgeted Income Statement					Explanation
	For Months of January, February, and March					January	February	March
		January	February	March	Units	10000*110%	11000*110%	12100*110%
	Sales	1518000	1669800	1836780		11000*138	12100*138	13310*138
	Cost of goods sold	605000	665500	732050		11000*55	12100*55	13310*55
	Gross profit	913000	1004300	1104730
	Expenses:
	Sales commissions (10%)	151800	166980	183678		10% of Sales	10% of Sales	10% of Sales
	Advertising	295200	295200	295200		246000*120%	246000*120%	246000*120%
	Store rent	26,300	26,300	26,300
	Administrative salaries	51500	51500	51500
	Depreciation	61500	61500	61500
	Other expenses	14300	14300	14300
	Total expenses	574300	589480	606178
	Net profit	338700	414820	498552