COMPREHENSIVE PROBLEM $[$LO$1-$ C$3$; LO$2-$ CC$5,6,71$

Allen Moving and Storage prepared the following income statement for $2018$:

CHECK FIGURE

$(2)$ Break$-$even sales

$=$ $$4,838,485$

Revenues:

Local: $$1,433,500$

Intra$-$province: $$510,000$

Inter$-$province: $$2,490,500$

Containers: $$333,000$

Packing: $$437,000$

Storage: $$289\mathrm{.}000$

Total revenues: $$5,493,000$ Less expenses:

Outside vehicle repair: $ $220,000$

Fuel: $$352,000$

Sales commissions: $$102,000$

Tires, oil, lube: $$20,500$

Wages $($driver and helper$)$: $$1,584,000$

Internal maintenance: $$293,000$

Advertising: $$88,000$

Equipment rental: $$422,000$

Packing materials: $$557,000$

Salaries: $$821,000$

Cargo loss claims: $$234,000$

Utilities: $$16,700$

Insurance: $$44,000$

Fuel taxes and tariffs: $$132,000$

Bad debt: $$193,000$

Depreciation: $$205\mathrm{.}000$

Total expenses: $$5,284,200$

Operating income: $ $208,800$

Less: Taxes $(42\%)$: $87,696$

Net income: $ $121,104$ Upon reviewing the income statement for $2018,$ chief financial officer Suzie Allen called a meeting to discuss the company's financial status. She invited sales manager Heidi Strom and controller Gautam Singh.

Allen: Our before$-$tax income has dropped from a high of $12\%$ of sales to about $4\%$ this last year. I know that both of you are aware of our problem and have some suggestions on how we can improve the situation.

Strom: Suzie, competition has become quite intense in our industry. I have two suggestions to help improve sales.

First, we need to increase our advertising budget. We have a good reputation, and I think we need to capitalize on it$.$

I suggest that we emphasize our expertise in crating electronic equipment and other sensitive instruments. Our losses in this area are minuscule. We have a much better record than any of our competitors, and we need to let customers and potential customers know about the quality of our services.

Allen: That sounds good. How much more do you need for advertising, and what kind of increase in sales would you predict?"

Strom: To do it right, I would need to double our current advertising budget. I would guess that sales would increase by $20\%.$ I also have another suggestion. I think we should look at the international goods and freight$-$moving market.

Many firms ship goods internationally, and I believe that they would switch to us if we entered that market. My preliminary analysis reveals that we could pick up $$500,000$ of sales during the first year.

Allen: Both suggestions seem to offer some potential for improving our profitability. Gautam, would you gather the data needed to estimate the effect of each of these two alternatives on our profits?

Singh: Sure. I have a suggestion also$$I plan to install a cost accounting system. At this point, we have no real idea how much each of our services is costing. I believe that there is some hope of reducing costs without affecting the quality of our services.

Allen: I$\text{'}$m all for reducing costs where possible. However, keep in mind that I don't want to lay off any employees yet. I like the idea of providing security to our employees. I would rather see everyone take a pay cut before we reduce our workforce. So far, we have been able to keep everyone despite the drop in our sales. I think it's a good policy. If these two ideas of Heidi's work out, no new hires may be necessary, and we have trained, loyal employees ready for the new business.

Required:

$1.$ Classify all expenses in the $2018$ income statement as either variable or fixed. Assume that each expense is strictly variable or strictly fixed with respect to sales revenue. Once the classification is completed, prepare a contribution margin income statement.

$2.$ Using the information obtained in Requirement $1,$ compute the revenue that Allen Moving and Storage needs to generate to break even. Now compute the revenue that is needed to earn operating income equal to $12\%$ of sales revenue.

$3.$ What is the maximum amount that Suzie can spend on additional advertising assuming that profits remain unchanged for $2019$ and sales will increase by $20\%,$ as predicted by Heidi? Suppose that Suzie spends the amount Heidi requested and sales increase by $20\%$; what will be the change in profits? Should Heidi's suggestion be adopted?

$4.$ Suppose that the directly traceable fixed expenses associated with entry into the international market are $$200,000.$ Assume that the variable$-$cost ratio for this segment is the same as that compu