Manufacturing Expenses Variable $3,250,000 Fixed overhead 640,000 3,890,000 Gros
ID: 2610933 • Letter: M
Question
Manufacturing Expenses
Variable $3,250,000
Fixed overhead 640,000 3,890,000
Gross Margin $4,610,000
Selling and administrative expenses
Commissions $580,000
Fixed marketing expenses 300,000
Fixed admin expenses 450,000 1,330,000
Net Operating Income $3,280,000
Fixed Interest expenses 230,000
Income before Taxes $3,050,000
Income Taxes (21%) 640,500
Net Income $2,409,500
Your company is considering out-sourcing the sales and marketing to an agency specializing in these types of sales. The outsourcing would remove the commissions, reduce the marketing by $270,000, and reduce the fixed administrative expenses by $35,000. The out-sourcing firm, Jangler Marketing, will charge a fee of 14% of sales. Jangler requires a 3-year contract. Jangler believes that it can increase sales by 10% for 2019 and 13% each year after (2020 and 2021). The company believes that with its current sales and marketing staff, sales will increase by 8% for 2019 and 9% in each year after (2020 and 2021).
1.Prepare contribution format projected income statements for 2019, 2020 & 202a assuming the company hires Jangler Marketing.
2.Prepare contribution format projected income statements assuming the outsourcing is rejected.
(Please show how you got each answer)
Explanation / Answer
Sales Gross Margin $4,610,000 Add: Manufacturing expenses 3,890,000 Sales $8,500,000 Variable manufacturing expenses % 38.2353% (3250000 ÷ 8500000) Commission % 6.8235% (580000 ÷ 8500000) 1 Contribution Format Income Statement(Hires Jangler) 10% Increase 13% Increase 13% Increase % 2019 2020 2021 Sales (8500000 x 110%) $ 9,350,000 $ 10,565,500 11,939,015 Less: Variable manufacturing expenses 38.2353% 3,575,000 4,039,750 4,564,917.50 Sales Commission (14% of sales) $ 1,309,000.00 $ 1,479,170.00 $ 1,671,462.10 Contribution Margin 4,466,000.00 5,046,580.00 5,702,635.40 Less: Fixed Expenses: Fixed Overhead 640,000 640,000 640,000 Fixed marketing expenses(300000-270000) 30,000 30,000 30,000 Fixed Admin Expenses (450000-35000) 415,000 415,000 415,000 Fixed Interest expenses 230,000 230,000 230,000 Total Fixed Expenses $ 1,315,000 $ 1,315,000 $ 1,315,000 Earning before taxes $ 3,151,000.00 $ 3,731,580.00 $ 4,387,635.40 Less: Tax at 21% 661,710.00 783,631.80 921,403.43 Net Income 2,489,290.00 2,947,948.20 3,466,231.97 2 Contribution Format Income Statement(Outsourcing Rejected) 8% Increase 9% Increase 9% Increase % 2019 2020 2021 Sales (8500000 x 108%) $ 9,180,000 $ 10,006,200 10,906,758 Less: Variable manufacturing expenses 38.2353% 3,510,000 3,825,900 4,170,231.00 Commission 6.8235% $ 626,400.00 $ 682,776.00 $ 744,225.84 Contribution Margin 5,043,600.00 5,497,524.00 5,992,301.16 Less: Fixed Expenses: Fixed Overhead 640,000 640,000 640,000 Fixed marketing expenses 300,000 300,000 300,000 Fixed Admin Expenses 450,000 450,000 450,000 Fixed Interest expenses 230,000 230,000 230,000 Total Fixed Expenses $ 1,620,000 $ 1,620,000 $ 1,620,000 Earning before taxes $ 3,423,600.00 $ 3,877,524.00 $ 4,372,301.16 Less: Tax at 21% 718,956.00 814,280.04 918,183.24 Net Income 2,704,644.00 3,063,243.96 3,454,117.92 Note: Since in 2019 and 2020 net income is hire under self marketing staff and also in 2021 only small difference, Outsourcing is not recommended.
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