Q. 1. Prepare a budgeted income statement for First-Class Ovenware for 2007 if the engineers redesign efforts had worked as originally planned. Use these assumptions:

1. First quarter sales of 1,500,000 units will be achieved each quarter in 2007.

2. The selling price for 2007 will remain 10% below the price charged from 2002-2006, and there were no sales price increases during the 2002-2006 period.

3. Variable cost of goods sold averaged about $5.55 per unit of ovenware from 2002-2006.

4. Variable production costs will be reduced by 35% due to the new design.

5. The fixed cost of production in 2006 contained one-time, increased costs (about $4,000,000) for the design changes. For 2007, fixed costs are expected to be about 3.5% higher than 2005.

6. Marketing costs contain both fixed and variable elements, however, it is budgeted based on spending 7% of expected sales revenue.

7. Other fixed costs are expected to increase about 2.5% over 2006.

Last Year's information

EXHIBIT ONE Kitchen Essential Products Inc. First-Class Ovenware Product Income Statement For the years ended December 31, 2002-2006 2006 $ 78,599,808 5,239,987 2005 $ 81,874,800 5,458,320 2004 $ 86,184,000 5,745,600 2003 $ 75,600,000 5,040,000 2002 $ 67,500,000 4,5*00,000 29,081,929 27,865,240 $ 21,652,639 31,112,424 23,221,033 $ 27,541,343 31,026,240 21,701,900 $ 33,455,860 27,972,000 19,729,000 $ 27,899,000 24,975,000 18,100,000 $ 24,425,000 Sales Sales in units Cost of Goods Sold Variable Fixed Gross Profit Attributable costs Marketing Other (primarily fixed) Product line profit before G&A allocation Return on Sales 5,894,986 2,517,537 6,140,610 2,502,522 5,774,328 2,317,150 5,140,800 2,106,500 4,758,750 1,915,000 $ 13,240,117 16.84% $ 18,898,211 23.08% $ 25,364,382 29.43% $ 20,651,700 27.32% $ 17,751,250 26.30%