Naomi Soderstrom sells over-boots for use in wintry conditions. Naomis products, worn over shoes, provide traction on

Naomi Soderstrom sells over-boots for use in wintry conditions. Naomi’s products, worn over shoes, provide traction on ice and packed snow, helping prevent falls. Naomi’s income for her most recent year of operations is as follows:

Naomi believes that while the cost of direct materials and direct labor varies with the number of units, the cost of variable selling and administration expenses are proportional to revenues.
Not satisfied with her current profit and 8 percent return on sales ($192,000/$2,400,000), Naomi wants to improve profits in the coming year. She is considering changing her selling price. If Naomi increases her selling price to $22 per unit, then she expects sales to stay at 120,000 units in the coming year. However, if she reduces her selling price to $19 per unit, then she expects sales to increase to 175,000 units.
Regardless of her pricing strategy, Naomi expects next year’s costs to be as follows:
• Direct material costs to increase by 10 percent.
• Direct labor costs to increase by 5 percent.
• Variable selling and administration costs to stay the same as a fraction of each sales dollar.
• Total fixed costs to stay the same at $888,000.

Required:
Prepare a budgeted income statement for each of Naomi’s two pricing choices. What price should Naomichoose?

Transcribed Image Text:

Revenues (120,000 units X $20) Variable costs $2,400,000 $480,000 Direct materials Direct labor Selling and administration 720,000 120,000 $1,320,000 $1,080,000 Contribution margin Fixed costs Manufacturing Marketing and sales General administration $540,000 120,000 228,000 888,000 Profit before taxes