9. The annual planning at Century Office Systems, Inc. had been arduous but produced a number of important marketing initiatives for the next year. Most notably, company executives had decided to restructure its product-marketing team into two separate groups: (1) Corporate Office System and (2) Home Office System. Angela Blake was assigned responsibility for the Home Office Systems group, which would market the company’s word-processing hardware and software for home and office-at-home use by individuals. Her marketing plan, which included a sales forecast for next year of $25 million, was the result of a detailed market analysis and negotiations with individuals both inside and outside the company. Discussions with the sales director indicated that 40% of the company sales force would be dedicated to selling products of the Home Office Systems group. Sales representative would receive a 15% commission on sales of Home Office Systems. Under the new organizational structure, the Home Office Systems group would be charged with 40% of the budgeted sales force expenditure. The sales director’s budget for salaries and fringe benefits of the sales force and non-commission selling costs for both the Corporate and Home Office Systems groups was $7.5 million.
The advertising and promotion budget contained three elements: trade magazine advertising, cooperative newspaper advertising with Century Office Systems, Inc. dealers, and sales promotion materials including product brochures, technical manuals, catalogs, and point-of-purchase displays. Trade magazine ads and sales promotion material were to be developed by the company’s advertising and public relations agency. Production and media placement costs were budgeted at $300,000. Cooperative advertising allowance policy stated that the company would allocate 5% of company sales to dealers to promote its office systems. Dealers always used their complete cooperative advertising allowances.
Meetings with manufacturing and operations personnel indicated that the direct costs of material and labor and direct factory overhead to produce the Home Office System product line represented 50% of sales. The accounting department would assign $600,000 in indirect manufacturing overhead (for example, depreciation, maintenance) to the product line and $300,000 for administrative overhead (clerical, telephone, office space, and so forth). Freight for the product line would average 8% of sales.
Blake’s staff consisted of two product managers and a marketing assistant. Salaries and fringe benefits for Ms. Blake and her staff were $250,000 per year.
a. Prepare a pro forma income statement for the Home Office Systems group given the information provided.
b. Prepare a pro forma income statement for the Home Office Systems group given annual sales of only $20 million.
c. At what level of dollar sales will the Home Office Systems group break even?
c- 20,681,818
To prepare a pro forma income statement for the Home Office Systems group, we need to gather all the relevant information provided in the passage and organize it into the appropriate sections of the income statement.
First, let's breakdown the components of the income statement:
1. Sales Revenue: This is the total revenue generated from the sales of Home Office Systems products.
2. Cost of Goods Sold (COGS): This includes the direct costs of material and labor, direct factory overhead, and freight.
3. Gross Profit: This is calculated by subtracting COGS from Sales Revenue.
4. Operating Expenses: This includes salaries and fringe benefits for Angela Blake and her staff, as well as the assigned overhead costs for manufacturing and administrative expenses.
5. Operating Income: This is calculated by subtracting Operating Expenses from Gross Profit.
Now let's calculate the pro forma income statement using the given information:
a. Prepare a pro forma income statement for the Home Office Systems group with a sales forecast of $25 million.
Income Statement for Home Office Systems Group:
Sales Revenue: $25,000,000
Cost of Goods Sold (COGS):
- Direct Costs of Material and Labor (50% of Sales): ($25,000,000 * 0.5) = $12,500,000
- Direct Factory Overhead: $600,000
- Administrative Overhead: $300,000
- Freight (8% of Sales): ($25,000,000 * 0.08) = $2,000,000
Total COGS: $15,400,000
Gross Profit: ($25,000,000 - $15,400,000) = $9,600,000
Operating Expenses:
- Salaries and Fringe Benefits: $250,000
- Assigned Overhead Costs: ($600,000 + $300,000) = $900,000
Total Operating Expenses: $1,150,000
Operating Income: ($9,600,000 - $1,150,000) = $8,450,000
b. Prepare a pro forma income statement for the Home Office Systems group with annual sales of only $20 million.
Using the same calculation method as above:
Income Statement for Home Office Systems Group:
Sales Revenue: $20,000,000
COGS: (50% of Sales): ($20,000,000 * 0.5) = $10,000,000
Direct Factory Overhead: $600,000
Administrative Overhead: $300,000
Freight (8% of Sales): ($20,000,000 * 0.08) = $1,600,000
Total COGS: $12,900,000
Gross Profit: ($20,000,000 - $12,900,000) = $7,100,000
Operating Expenses: $1,150,000
Operating Income: ($7,100,000 - $1,150,000) = $5,950,000
c. To find the level of dollar sales at which the Home Office Systems group breaks even, we need to calculate the break-even point.
Break-even sales can be calculated using the following formula:
Break-even sales = Fixed Costs / Contribution Margin
Fixed Costs include the Operating Expenses, which we calculated as $1,150,000.
The Contribution Margin is the percentage of each dollar of sales that contributes towards covering the Fixed Costs. In this case, the Contribution Margin is calculated by subtracting the COGS from the Sales Revenue and dividing it by the Sales Revenue.
Contribution Margin = (Sales Revenue - COGS) / Sales Revenue
Now, we can solve for the break-even sales:
Break-even sales = Fixed Costs / Contribution Margin
Remember to consider the different percentages and amounts provided in the passage and use the relevant data in the calculations.