Question

Prepare a budgeted income statement for First-Class Ovenware for 2007 if the engineers’ redesign efforts had worked as originally planned. Use these assumptions:
a. First quarter sales of 1,500,000 units will be achieved each quarter in 2007.
b. The selling price for 2007 will remain 10% below the price charged from 2002-2006, and there were no sales price increases during the 2002-2006 period.
c. Variable cost of goods sold averaged about $5.55 per unit of ovenware from 2002-2006.
d. Variable production costs will be reduced by 35% due to the new design.
e. The fixed cost of production in 2006 contained one-time, increased costs (about $4,000,000) for the design changes. For 2007, fixed costs are expected to be about 3.5% higher than 2005.
f. Marketing costs contain both fixed and variable elements, however, it is budgeted based on spending 7% of expected sales revenue.
g. Other fixed costs are expected to increase about 2.5% over 2006.

Would the product manager have met his profit target of 25% return on sales in 2007 for the product line with the redesign?

Answer 1

Explanation: see attachment below

Answer 2

Answer:(a) Sales 81,000,000 (b ) sales in unit 6,000,000 (c) Cost of good sold Variable 21,645,000 fixed 24,033,769.16 (d) 35,321,230.84 (e ) Attributable Cost, Marketing cost 5,580,000, Other (primarily fixed ) 2,580,475.425 (g) Product line profit beforeG&A Allocation 27,160,755.42 (h) Return on Sales 33.5%, The product manager would meet his profit target of 25% on Sales in 2007

Explanation:

The question is not complete, here is the missing part of the question

First class ovenware income statements for the year ended 31st December 2002-2006

2006. 2005. 2004. 2003

Sales. 78,599,808. 81,874,800. 86,184,000. 75,600,000

Sales in unit 5,239,987. 5,458,320. 5,745,600. 5,040,000

Cost of Good Sold

Variable. 29,081,929. 31,112,424. 31,026,240. 27,972,000

Fixed. 27,865,240. 23,221,033. 21,701,900. 19,729,000

Gross Profit. 21,652,639. 27,541,343. 33,455,860. 27,899,000

Attributable Cost

Marketing cost. 5,894,986. 6,140,610. 5,774,328. 5,140,800

Other(primarily fixed ) 2,517,537. 2,502,522. 2,317,150. 2,106,500

Product line profit

Before G&A Allocation. 13,240,117. 18,898,211. 25,364,382. 20,651,700

Return on Sales. 16.84% 23.08% 29.43% 27.32%

Here is the solution

First class ovenware budgeted income statement for the year ended December 31st 2007

Sales. 81,000,000

Sales unit. 6,000,000

Cost of Good Sold

Variable 21,645,000

Fixed 24,033,769.16

Gross Profit. 35,321,230.84

Attributable Cost

Marketing cost. 5,580,000

Other(primarily fixed ) 2,580,475.425

Product line profit before G&A Allocation 27,160,755.42

Return on Sales 33.5%

Workings

Sales 6,000,000 × $15 = 90,000,000

10% × 90,000,000 = 9,000,000

Sales in unit 1,500,000 × 4 = 6,000,000

Cost of Good Sold

Variable ($5.55 - 35%) × 6,000,000

= 35% × 5.55 = 1.9425

= 5.55 - 1.9425 = 3.6075 × 6,000,000 = 21,645,000

Fixed ( fixed cost 2005 + 3.5%)

( 23,221,033 + 3.5%)

= 3.5% × 23,221,033 = 812,736.155

= 23,221,033 + 812,736.155 = 24,033,769.16

Gross Profit = Sales - Variable cost + Fixed cost

Variable cost + Fixed cost

= 21,645,000 + 24,033,769.16

=45,678,769.16

81,000,000 - 45,678,769.16

= 35,321,230.84

Attributable Cost

Marketing cost = 6,000,000 × 7% = 420,000

6,000,000 - 420,000 = 5,580,000

Other ( primarily fixed) Fixed cost 2006 ( 1 + 2.5%)

= 2,517,537 ( 1 + 0.025)

= 2,517,537 ( 1.025)

= 2,580,475.425

Product line profit before G & A Allocation = Gross Profit - Attributable Cost

= 35, 321,230.84 - 8,160,475. 425

= 27,160,755.42

Return on Sales = Product line profit before G&A Allocation / Sales

= 27,160,755.42 / 81,000,000

= 0.335

= 0.335 × 100

= 33.5%