Question
Seating Company is currently selling 1 comma 5001,500 oversized bean bag chairs a month at a price of $9090 per chair. The variable cost of
Seating Company is currently selling
1 comma 5001,500
oversized bean bag chairs a month at a price of
$9090
per chair. The variable cost of each chair sold includes
$3030
to purchase the bean bag chairs from suppliers and a
$22
sales commission. Fixed costs are
$ 15 comma 000$15,000
per month. The company is considering making several operational changes and wants to know how the change will impact its operating income.Read the requirements
LOADING...
.
Requirement 1. Prepare the company's current contribution margin income statement. (Use parentheses or a minus sign for an operating loss.)
Decor Seating Company | |||||
Contribution Margin Income Statement | |||||
| Sales revenue |
|
| $135,000 | |
| Variable expenses: |
|
|
| |
| Cost of goods sold |
| $45,000 |
| |
| Operating expenses |
| 3,000 | 48,000 | |
| Contribution margin |
|
| 87,000 | |
| Fixed expenses |
|
| 15,000 | |
| Operating income (loss) |
|
| $72,000 |
Requirement 2. Calculate the change in operating income that would result from implementing each of the following independent strategy alternatives. Compare each alternative to the current operating income as you calculated in Requirement 1. Consider each alternative separately.
a. Alternative 1: The company believes volume will increase by
2020%
if salespeople are paid a commission of
1212%
of the sales price rather than the current
$22
per unit. (Use parentheses or a minus sign for an operating loss.)
Decor Seating Company | |||||
Contribution Margin Income Statement | |||||
| Sales revenue |
|
| $162,000 | |
| Variable expenses: |
|
|
| |
| Cost of goods sold |
| $54,000 |
| |
| Operating expenses |
| 19,440 | 73,440 | |
| Contribution margin |
|
| 88,560 | |
| Fixed expenses |
|
| 15,000 | |
| Operating income (loss) |
|
| $73,560 |
Operating income from implementing these changes would | increase | by $ | 1,560 | from Requirement 1. |
b. Alternative 2: The company believes that spending an additional
$ 3 comma 000$3,000
on advertising would increase sales volume by
1414%.
(Use parentheses or a minus sign for an operating loss.)
Decor Seating Company | |||||
Contribution Margin Income Statement | |||||
| Sales revenue |
|
| $153,900 | |
| Variable expenses: |
|
|
| |
| Cost of goods sold |
| $51,300 |
| |
| Operating expenses |
| 3,420 | 54,720 | |
| Contribution margin |
|
| 99,180 | |
| Fixed expenses |
|
| 18,000 | |
| Operating income (loss) |
|
| $81,180 |
Operating income from implementing these changes would | increase | by $ | 9,180 | from Requirement 1. |
c. Alternative 3: The company is considering raising the selling price to
$104104,
but believes volume would drop by
2020%
as a result. (Use parentheses or a minus sign for an operating loss.)
Decor Seating Company | |||||
Contribution Margin Income Statement | |||||
| Sales revenue |
|
|
| |
| Variable expenses: |
|
|
| |
| Cost of goods sold |
|
|
| |
| Operating expenses |
|
|
| |
| Contribution margin |
|
|
| |
| Fixed expenses |
|
|
| |
| Operating income (loss) |
|
|
|
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started