Refer to the information in C 3. In January 2011, Sophia Callas, the president of Datura, Ltd., conducted a strategic planning meeting. Duting the meeting, phillipe Mazzeo, vice president of distribution, noted that because of a new contract with an international shipping line, the company’s fixed distribution costs for 2011 would be reduced by 10 percent and its variable distribution costs by 4 percent. Gino Roma, vice president of sales, offered the following information:

We plan to sell 15,000 sets of pottery again in 2011, 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.

Sophia Callas is concerned that the changes described by Roma and Mazzeo may not improve operating income sufficiently in 2011. 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 in a written report. Because it is already January of 2011 and changes need to be made quickly, she requests your report within five days.

1. Prepare a budgeted contribution margin income statement for 2011. Your report should show the budgeted (estimated) operating income based on the information provided above and in C3. Will the changes improve operating income sufficiently? Explain.

2. In preparation for writing your report, answer the following questions:

a. Why are you preparing the report?

b. Who needs the report?

c. What sources of information will you use?

d. When is the report due?