Luis Herrera, an up-and-coming fashion designer, created a new line of men's fashion socks in response to the growing number of celebrities who are expressing their individuality by replacing traditional navy and black socks with brighter colors and bold patterns. At a sales price of $10 per pair, Luis estimates monthly sales volume will be 20,000 pair. Variable product costs will be $6.50 per pair and fixed overhead will be
$1.60 per pair. Half of the fixed overhead is directly traceable to the new sock line. To promote the socks, Herrera proposes a $0.50 per pair commission to the company's salespeople and a $10,000 per month advertising campaign. In compliance with corporate policy, the socks will also be allocated $25,000 in fixed corporate support costs.

a. Prepare a traditional monthly income statement for the proposed sock line.
b. Prepare a monthly income statement that highlights the proposed sock line's segment margin.
c. Which income statement would you recommend that Luis use when pitching the proposed sock line to company managers? Why would you recommend that he use this statement?

  • CreatedFebruary 21, 2014
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