In January 2015, the president of Datura, Ltd. conducted a strategic planning meeting. During the meeting, the vice president of distribution noted that because of a new contract with an international shipping line, the company’s fixed distribution costs for 2015 would be reduced 10 percent and its variable distribution costs by 4 percent. The vice president of sales offered the following information.
We plan to sell 15,000 sets of pottery again in 2015, but based on review of the competition, we are going to lower the selling price to 890 per set. To encourage increased sales, we will raise sales commissions to 12 percent of the selling price.
The president is concerned that the changes described by the vice presidents may not improve operating income sufficiently in 2015. If operating income does not increase by at least 10 percent, she will want to find other ways to reduce the company’s costs. She asks you to evaluate the situation by preparing a report.
Question: Prepare a budgeted contribution margin income statement for 2015. Your reportshould show the budgeted (estimated) operating income based on the information provided above and in C3. Will the changes improve operating income sufficiently? Explain?