1) Santana Rey expects second-quarter 2016 sales of her new line of computer furniture to be the same as the first quarters sales (reported below) without any changes in strategy. Monthly sales averaged 39 desk units (sales price of $1,210) and 16 chairs (sales price of $460).

BUSINESS SOLUTIONS
Segment Income Statement*
For Quarter Ended March 31, 2016
Sales	$	163,650
Cost of goods sold		121,950
Gross profit		41,700
Expenses
Sales commissions (10%)		16,365
Advertising expenses		7,800
Other fixed expenses		16,800
Total expenses		40,965
Net income	$	735

* Reflects revenue and expense activity only related to the computer furniture segment.

Revenue: (117 desks $1,210) + (48 chairs $460) = $141,570 + $22,080 = $163,650

Cost of goods sold: (117 desks $710) + (48 chairs $210) + $28,800 = $121,950

Santana Rey believes that sales will increase each month for the next three months (April, 47 desks, 28 chairs; May, 51 desks, 31 chairs; June, 55 desks, 34 chairs) if selling prices are reduced to $1,090 for desks and $410 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 $710 for desks and $210 for chairs. The sales staff will continue to earn a 10% commission, the fixed manufacturing costs per month will remain at $9,600 and other fixed expenses will remain at $5,600 per month.

Required:

A)

Prepare budgeted income statements 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.

BUSINESS SOLUTIONS
Budgeted Income Statements
For Months of April, May, and June
	April	May	June
	$62,710	$68,300	$73,890
	62,710	68,300	73,890
Expenses
Sales commissions
Advertising		0	0
Other fixed expenses		0	0
Total expenses	0	0	0
Net income (loss)

2)

Business Solutions's second quarter 2016 fixed budget performance report for its computer furniture operations follows. The $170,020 budgeted expenses include $114,240 in variable expenses for desks and $21,780 in variable expenses for chairs, as well as $34,000 fixed expenses. The actual expenses include $35,400 fixed expenses. List fixed and variable expenses separately.

	Fixed Budget		Actual Results		Variances
Desk sales (in units)		136		142
Chair sales (in units)		66		74
Desk sales	$	182,240	$	188,860	$	6,620 F
Chair sales		34,320		39,590		5,270 F
Total expenses		170,020		179,430		9,410 U
Income from operations	$	46,540	$	49,020	$	2,480 F

A) Prepare a flexible budget performance report that shows any variances between budgeted results and actual results.

BUSINESS SOLUTIONS
Flexible Budget Performance Report
For Quarter Ended June 30
	Flexible Budget	Actual Results	Variance	Fav./Unf.
Contribution margin

3)

Santana Rey is considering the purchase of equipment for Business Solutions that would allow the company to add a new product to its computer furniture line. The equipment is expected to cost $265,000 and to have a five-year life and no salvage value. It will be depreciated on a straight-line basis. Business Solutions expects to sell 100 units of the equipments product each year. The expected annual income related to this equipment follows.

Sales	$	375,000
Costs
Materials, labor, and overhead (except depreciation)		192,000
Depreciation on new equipment		53,000
Selling and administrative expenses		30,000
Total costs and expenses		275,000
Pretax income		100,000
Income taxes (35%)		35,000
Net income	$	65,000

A) Compute the payback period.

Payback Period
Choose Numerator:	/	Choose Denominator:	=	Payback Period
	/		=	Payback period
			=	0

B) Compute the accounting rate of return for this equipment.

Accounting Rate of Return
Choose Numerator:	/	Choose Denominator:	=	Accounting Rate of Return
	/		=	Accounting rate of return
				0