Luis Herrera, an up-and-coming fashion designer, created a new line of men’s fas
ID: 2545992 • Letter: L
Question
Luis Herrera, an up-and-coming fashion designer, created a new line of men’s fashion socks in response to the growing number of celebrities who are expressing their individuality by replacing traditional navy and black socks with brighter colors and bold patterns. At a sales price of $10.00 per pair, Luis estimates monthly sales volume will be 20,000 pairs. Variable product costs will be $6.50 per pair and fixed overhead will be $1.60 per pair. Half of the fixed overhead is directly traceable to the new sock line. To promote the socks, Herrera proposes a $0.50 per pair commission to the company’s salespeople and a $10,000 per month advertising campaign. In compliance with corporate policy, the socks will also be allocated $25,000 in fixed corporate support costs.
-Prepare a traditional monthly income statement for the proposed sock line
-Prepare a monthly income statement that highlights the proposed sock line’s segment margin
Luis Herrera, an up-and-coming fashion designer, created a new line of men’s fashion socks in response to the growing number of celebrities who are expressing their individuality by replacing traditional navy and black socks with brighter colors and bold patterns. At a sales price of $10.00 per pair, Luis estimates monthly sales volume will be 20,000 pairs. Variable product costs will be $6.50 per pair and fixed overhead will be $1.60 per pair. Half of the fixed overhead is directly traceable to the new sock line. To promote the socks, Herrera proposes a $0.50 per pair commission to the company’s salespeople and a $10,000 per month advertising campaign. In compliance with corporate policy, the socks will also be allocated $25,000 in fixed corporate support costs.
-Prepare a traditional monthly income statement for the proposed sock line
-Prepare a monthly income statement that highlights the proposed sock line’s segment margin
Explanation / Answer
2)
**alocated fixed cost and corporate fixed cost is not a relevant cost as it will be incurred whether line is introduced or not
c)stock line segment margin income statement should be recommended as it shows how much profit a segment will earn if introduced.
Traditional Income statement sales volume [20000*10] 200000 less:cost of goods sold variable product cost [6.5*20000] 130000 Fixed overhead [1.6*20000] 32000 162000 Gross margin 38000 operating cost sales commission [.50*20000] 10000 Advertising 10000 coporate support cost 25000 45000 Net Income (7000)Related Questions
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