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. (Please show how you got each answer)

Answer 1

1	Income Statement in case of Outsourcing to Agency
		2018	2019	2020	2021	Remark
	Sales	$8,500,000	$9,350,000	$10,565,500	$11,939,015	Increase sales by 10%in 2019 and 13% in 2020, 2021
Less	Manafuring Expense
	Variable	$3,250,000	$3,575,000	$4,039,750	$4,564,918
	Fixed Overhead	$640,000	$640,000	$640,000	$640,000
	Gross Margin	$4,610,000	$3,826,000	$4,406,580	$5,062,635
Less	selling & adminstrative expense
	Comission	$580,000	-	-	-	Commision is nil
	comission on sales		$1,309,000	$1,479,170	$1,671,462	14% comission on sales to agency
	Fixed marketing expense	$300,000	$30,000	$30,000	$30,000	reduced by $270000
	Fixed Admin Expense	$450,000	$415,000	$380,000	$345,000	reduce by 35000
	Net Operating Income	$3,280,000	$2,072,000	$2,517,410	$3,016,173
Less	Fixed Interst Expense	$230,000	$230,000	$230,000	$230,000
	Income before tax	$3,050,000	$1,842,000	$2,287,410	$2,786,173
Less	Income tax( 21%)	$2,409,500	$1,455,180	$1,807,054	$2,201,077
	Income after Tax	$640,500	$386,820	$480,356	$585,096
2	Income Statement in case of Outsourcing to Agency proposal rejected
		2018	2019	2020	2021
	Sales	$8,500,000	$9,180,000	$10,006,200	$10,906,758	Increase sales by 8%in 2019 and 9% in 2020, 2021
Less	Manafuring Expense
	Variable	$3,250,000	$3,510,000	$3,825,900	$4,170,231
	Fixed Overhead	$640,000	$640,000	$640,000	$640,000
	Gross Margin	$4,610,000	$5,030,000	$5,540,300	$6,096,527
Less	selling & adminstrative expense
	Comission	$580,000	$580,000	$580,000	$580,000
	Fixed marketing expense	$300,000	$300,000	$300,000	$300,000
	Fixed Admin Expense	$450,000	$450,000	$450,000	$450,000
	Net Operating Income	$3,280,000	$3,700,000	$4,210,300	$4,766,527
Less	Fixed Interst Expense	$230,000	$230,000	$230,000	$230,000
	Income before tax	$3,050,000	$3,470,000	$3,980,300	$4,536,527
Less	Income tax( 21%)	$2,409,500	$2,741,300	$3,144,437	$3,583,856
	Income after Tax	$640,500	$728,700	$835,863	$952,671