Edwards & Shaw is a merchandising company that is the sole distributor of a prod
ID: 2431015 • Letter: E
Question
Edwards & Shaw is a merchandising company that is the sole distributor of a product that is increasing in popularity. The company’s income statement for the three most recent months is listed below.
Edwards and Shaw
Income Statement
For the Three Months Ending September
July
August
September
Sales in Units
4,500
5,000
6,000
Sales Revenue
$675,000
$750,000
$900,000
Cost of Goods Sold
275,000
300,000
350,000
Gross Margin
400,000
450,000
550,000
Operating Expenses:
Advertising Expense
11,000
11,000
11,000
Shipping Expense
27,000
30,000
36,000
Salaries and Commissions
127,500
135,000
150,000
Legal Expense
7,000
7,000
7,000
Depreciation Expense
10,000
10,000
10,000
Total Operating Expenses
182,500
193,000
214,000
Operating Income
$217,500
$257,000
$336,000
Edwards and Shaw are considering a multimedia advertising campaign that should increase sales by $50,000 per month. The ad campaign will cost an additional $1,500 per month and will be considered a fixed cost. How will the ad campaign affect product cost? How will the increase in fixed costs affect the break-even point? Explain.
July
August
September
Sales in Units
4,500
5,000
6,000
Sales Revenue
$675,000
$750,000
$900,000
Cost of Goods Sold
275,000
300,000
350,000
Gross Margin
400,000
450,000
550,000
Operating Expenses:
Advertising Expense
11,000
11,000
11,000
Shipping Expense
27,000
30,000
36,000
Salaries and Commissions
127,500
135,000
150,000
Legal Expense
7,000
7,000
7,000
Depreciation Expense
10,000
10,000
10,000
Total Operating Expenses
182,500
193,000
214,000
Operating Income
$217,500
$257,000
$336,000
Explanation / Answer
The ad campaign will not affect the product cost as the advertising cost is a period cost and is not considered a product cost. The break-even point will increase as the fixed costs will increase. Break even units will increase to cover increased fixed costs.
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