Income Statement For the Year Ended December 31 2018 Sales 8

Income Statement For the Year Ended December 31, 2018 Sales $8,500,000 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

1 Income Statement in case of Outsourcing to Agency 2018 2019 2020 2021 Remark Sales $8,500,000 $9,350,000 $10,565,500 $11,939,015 Increase sales by 10%in 2019 and 13% in 2020, 2021 Less Manafuring Expense Variable $3,250,000 $3,575,000 $4,039,750 $4,564,918 Fixed Overhead $640,000 $640,000 $640,000 $640,000 Gross Margin $4,610,000 $3,826,000 $4,406,580 $5,062,635 Less selling & adminstrative expense Comission $580,000 - - - Commision is nil comission on sales $1,309,000 $1,479,170 $1,671,462 14% comission on sales to agency Fixed marketing expense $300,000 $30,000 $30,000 $30,000 reduced by $270000 Fixed Admin Expense $450,000 $415,000 $380,000 $345,000 reduce by 35000 Net Operating Income $3,280,000 $2,072,000 $2,517,410 $3,016,173 Less Fixed Interst Expense $230,000 $230,000 $230,000 $230,000 Income before tax $3,050,000 $1,842,000 $2,287,410 $2,786,173 Less Income tax( 21%) $2,409,500 $1,455,180 $1,807,054 $2,201,077 Income after Tax $640,500 $386,820 $480,356 $585,096 2 Income Statement in case of Outsourcing to Agency proposal rejected 2018 2019 2020 2021 Sales $8,500,000 $9,180,000 $10,006,200 $10,906,758 Increase sales by 8%in 2019 and 9% in 2020, 2021 Less Manafuring Expense Variable $3,250,000 $3,510,000 $3,825,900 $4,170,231 Fixed Overhead $640,000 $640,000 $640,000 $640,000 Gross Margin $4,610,000 $5,030,000 $5,540,300 $6,096,527 Less selling & adminstrative expense Comission $580,000 $580,000 $580,000 $580,000 Fixed marketing expense $300,000 $300,000 $300,000 $300,000 Fixed Admin Expense $450,000 $450,000 $450,000 $450,000 Net Operating Income $3,280,000 $3,700,000 $4,210,300 $4,766,527 Less Fixed Interst Expense $230,000 $230,000 $230,000 $230,000 Income before tax $3,050,000 $3,470,000 $3,980,300 $4,536,527 Less Income tax( 21%) $2,409,500 $2,741,300 $3,144,437 $3,583,856 Income after Tax $640,500 $728,700 $835,863 $952,671