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Pippa's Pilot Headware, Inc
Pippa's Pilot Headware, Inc. produces pilot headware. Sales have been very erratic, with some months showing a profit and some moths showing a loss. The company's contribution format income statement for the most recent month is given below: Sales (15,000 units at $85 per unit) Variable expenses Contribution Margin Fixed expenses Net operating Income 1,275,000 840,000 435,000 270,000 165,000 Required: Refer to the original data. The sales manager feels that a $25,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $15,000 increase in monthly sales. Prepare a contribution margin income statement with these changes.
Expert Solution
In this case keep in mind variable expenses will change with change in sales. Currently variable expenses is 66% of sales calculated as 840,000 / 1275000 now lets prepare new contribution income statement
| Sales (1275,000+15,000) | 1290,000 |
| Variable expenses ( 1290,000*66%) | 851,400 |
| Contribution margin | 438,600 |
| Fixed expenses (270,000+25,000) | 295,000 |
| Net operating income | 143,600 |
The advertising expense is a fixed expense that must be added to existing fixed expense of 270,000
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