Refer to the information in C3. 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 by 10 percent and its variable distribution costs by 4 percent. The vice president of sales offered the following information:
In C3, Based in Italy, Datura, Ltd., is an international importer-exporter of pottery with distribution centers in the United States, Europe, and Australia. The company was very successful in its early years, but its profitability has since declined. As a member of a management team selected to gather information for Datura€™s next strategic planning meeting, you have been asked to review its most recent contribution margin income statement for the year ended December 31, 2014, which follows.

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 in a written report. Because it is already January 2015 and changes need to be made quickly, she requests your report within five days.
1. Prepare a budgeted contribution margin income statement for 2015. 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 reportdue?

Transcribed Image Text:

Datura, Ltd. Contribution Margin Income Statement For the Year Ended December 31, 2014 Sales revenue Less variable costs: 13,500,000 Purchases Distribution Sales commissions Total variable costs 6,000,000 2,115,000 1410,000 9,525,000 3,975,000 Contribution margin Less fixed costs Distribution Selling General and administrative Total fixed costs E 985,000 ,184,000 871,875 3,040,875 E 934,125 Operating income