Customer Profitability

Olin Company manufactures and distributes carpentry tools. Production of the tools is in the mature portion of the product life cycle. Olin has a sales force of 20. Salespeople are paid a commission of 7 percent of sales, plus expenses of $35 per day for days spent on the road away from home, plus $0.50 per mile. They deliver products in addition to making the sales, and each sales person is required to own a truck suitable for making deliveries.

For the coming quarter, Olin estimates the following:

Sales		$1,300,000
Cost of goods sold		450,000

On average, a salesperson travels 6,000 miles per quarter and spends 38 days on the road. The fixed marketing and administrative expenses total $400,000 per quarter.

Required:

1. Prepare an income statement for Olin Company for the next quarter.

Olin Company
Income Statement
For the Coming Quarter
Sales	$
Less: Cost of goods sold
Gross profit	$
Less: Variable marketing:
Commissions
Mileage
Road time
Fixed marketing and administrative expenses
Operating income	$

Feedback

Use the GAAP required income statement format.

2. Suppose that a large hardware chain, MegaHardware, Inc., wants Olin Company to produce its new SuperTool line. This would require Olin Company to sell 80 percent of total output to the chain. The tools will be imprinted with the SuperTool brand, requiring Olin to purchase new equipment, use somewhat different materials, and reconfigure the production line. Olin's industrial engineers estimate that cost of goods sold for the SuperTool line would increase by 15 percent. No sales commission would be incurred, and MegaHardware would link Olin to its EDI system. This would require an annual cost of $100,000 on the part of Olin. MegaHardware would pay shipping. As a result, the sales force would shrink by 80 percent. Prepare a revised income statement for Olin Company for the next quarter.

Olin Company
Revised Income Statement
For the Coming Quarter
Sales	$
Less: Cost of goods sold
Gross profit	$
Less: Variable marketing:
Commissions
Mileage
Road time
Fixed marketing and administrative expenses
Operating income	$