PROBLEM $22\mathrm{.}5$A

Analysis of Responsibility Income Statements

The following are responsibility income statements for Butterfield, Inc., for the month of March.

page $992$

Images

Instructions

The company plans to initiate an advertising campaign for one of the two products in Division $1.$ The campaign would cost $$10,000$ per month and is expected to increase the sales of whichever product is advertised by $$30,000$ per month. Compute the expected increase in the responsibility margin of Division $1$ assuming that $(1)$ product A is advertised and $(2)$ product B is advertised.

Assume that the sales of both products by Division $1$ are equal to total manufacturing capacity. To increase sales of either product, the company must increase manufacturing facilities, which means an increase in traceable fixed costs in approximate proportion to the expected increase in sales. In this case, which product line would you recommend expanding? Explain.

The income statement for Division $1$ includes $$21,000$ in common fixed costs. What happens to these fixed costs in the income statement for Butterfield, Inc.?

Assume that in April the monthly sales in Division $2$ increase to $$200,000.$ Compute the expected effect of this change on the operating income of the company $($assume no other changes in revenue or cost behavior$).$

Prepare an income statement for Butterfield, Inc., by division, under the assumption stated in part d$.$ Organize this income statement in the format illustrated, including columns for percentages.The following are responsibility income statements for Butterfield, Inc., for the month of March.

Investment Centers

Instructions

assuming that $(1)$ product A is advertised and $(2)$ product B is advertised.

line would you recommend expanding? Explain.

c$.$ The income statement for Division $1$ includes $$21,000$ in common fixed costs. What happens to these fixed costs in the income statement for Butterfield, Inc.?

d$.$ Assume that in April the monthly sales in Division $2$ increase to $$200,000.$ Compute the expected effect of this change on the operating income of the company $($assume no other changes in revenue or cost behavior$).$

e$.$ Prepare an income statement for Butterfield, Inc., by division, under the assumption stated in part d$.$ Organize this income statement in the format illustrated, including columns for percentages.