Manufacturing Expenses Variable 3250000 Fixed overhead 64000

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)

Solution

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.