You have been asked to review its most recent contribution margin income stateme

Question

You have been asked to review its most recent contribution margin income statement for the year ended December 31, 2015, which follows: *In 2015, Datura sold 15,000 sets of pottery. Part 2. Refer to the information in Part One. In January 2016, the president of Datura, Ltd., conducted a strategic planning meeting. During the meeting, the vice president of distribution noted that because of a new contract with an international shipping line, the company's fixed distribution costs for 2016 would be reduced 10 percent and its variable distribution cost per unit by 4 percent. The vice president of sales offered the following information: We plan to sell 15,000 sets of pottery again in 2016, but based on review of the competition, we are going to lower the selling price to $890 per set. To encourage increased sales, we will raise sales commissions to 12 percent of the selling price. The president is concerned that the changes described by the vice presidents may not improve operating income sufficiently in 2016. If operating income does not increase by at least 10 percent, she will want to find other ways to reduce the company's costs. She asks you to evaluate the situation by preparing a report. REQUIRED: Prepare a budgeted contribution margin income statement for 2016. Your report should show the budgeted (estimated) operating income based on the information presented in Part One and Part two. Will the changes improve operating income sufficiently? Explain?

Explanation / Answer

Answer:

Datura Ltd Revised Budgeted Contribution Margin Income Statements Sales 13350000 Less: Variable costs Purchases 6000000 Distribution 2030400 Sales comm 1602000 Total variable costs 9632400 Contribution margin 3717600 Less: Fixed costs Distribution 886500 Selling 1184000 General and administrative 871875 Total fixed cosrs 2942375 Operating income 775225

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