The annual planning process at Big Time Office Systems had been arduous, but produced a number of important marketing initiatives for the next year. Most notably, company executives decided to restructure its product-marketing team into 2 separate groups: 1) Corporate Office Systems and 2) Home Office Systems group. Chad Stevens was in charge of the Home Office Group, which would be responsible for marketing the company's word-processing hardware and software for home and office-at-home use by individuals. His marketing plan, which included sales forecast for the next year of $35 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 30% of the company sales force would be dedicated to selling products of the Home Office Systems group. Sales representatives would receive a 10% commission on sales of home office systems. Under the new organizational structure, the Home Office Systems group would be charged with 30% of budgeted sales force expenditure. The sales director's budget for salaries and fringe benefits of the sales force and noncommission selling costs for both Corporate and Home Office Systems group was $8.5 million.
The advertising and promotion budget contained three elements: trade magazine advertising, cooperative newspaper advertising with Apple Dealers, and sales promotion materials including product brochures, technical manuals, catalog, and point of purchase displays. Trade magazine ads and sales promotion materials 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 copy for both the newspaper and the radio use has budgeted production costs of $150,000. Apple's cooperative advertising allowance policy stated that the company would allocate 6.0% 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 40.0% of sales. The accounting department would assign $600,000 in indirect manufacturing overhead to the product line and $500,000 for administrative overhead. Freight for the product line would average 4.0% of sales.
Stevens' staff consisted of two product managers and a marketing assistant. Salaries and frige benefits of Mr. Stevens and his staff were $400,000 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 $26 million.
C. At what level of dollar sales will the Home Office Systems group break even?