Solved: HCS Mfg makes its product for 60 and sells it

HCS Mfg makes its product for 60 and sells it

HCS Mfg. makes its product for $60 and sells it for $130 per unit. The sales staff receives a
10% commission on the sale of each unit. Its June income statement follows.

HCS MFG.

Income Statement

For Month Ended June 30, 2015

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,300,000

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . 600,000

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000

Operating expenses

Sales commissions (10%) . . . . . . . . . . . . . . . . . 130,000

Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000

Store rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000

Administrative salaries . . . . . . . . . . . . . . . . . . . 40,000

Depreciation—Office equipment . . . . . . . . . . . 50,000

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . 12,000

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . 456,000

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 244,000

Management expects June’s results to be repeated in July, August, and September without any
changes in strategy. Management, however, has another plan. It believes that unit sales will
increase at a rate of 10% each month for the next three months (beginning with July) if the
item’s selling price is reduced to $115 per unit and advertising expenses are increased by 25%
and remain at that level for all three months. The cost of its product will remain at $60 per unit,
the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the
same.

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 Required

1. Prepare budgeted income statements for each of the months of July, August, and September
that show the expected results from implementing the proposed changes. Use a three-column
format, with one column for each month.

Analysis Component

2. Use the budgeted income statements from part 1 to recommend whether management
should implement the proposed plan. Explain.

HCS Mfg makes its product for 60 and sells it

ANSWER
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