P $14-$B$-7$: Devil & Evil SoundMachines

Devil & Evil SoundMachines manufactures and distributes four different Home$-$Cinema$-$Soundsystems.

The following table summarizes the unit sales, selling prices, and manufacturing costs of each Home$-$

Cinema$-$Soundsystem:

Selling and distribution $($S&D$)$ expenses are treated as a period cost and written off to the income

statement. To assess the relative profitability of each product, S&D expenses are allocated to each

product based on sales revenue.

Upon further investigation of the S&D expenses, $50$ percent are shown to be for marketing and adverti$-$

sing$.$ Each product has its own advertising and marketing budget, administered by one of four marketing

managers. The distribution of the advertising and marketing budget among the four product lines is

shown below in the table.

The remaining S&D expenses consist of distribution and administration costs $(25$ percent$)$ and selling

costs $(25$ percent$).$ The distribution and administration department is responsible for arranging shipping

and for billing the customers. $($Customers pay transportation charges directly to the common carrier.$)$

Upon analysis, each product line places equal demands on the distribution and administration depart$-$

ment, and each consumes about the same resources as the others. Selling costs consist primarily of

commissions paid to independent salespeople. The commissions are based on gross margin on the

product $($gross margin $=$ sales revenue less manufacturing cost$).$

Summary of Selling and distribution $($S&D$)$ expenses in detail:

Distribution among the product lines:

Required:

a$.$ Allocate all S&D expenses based only on sales revenue and calculate the net income per product

line.

b$.$ Allocate all S&D expenses based only on the advertising and marketing budget and calculate the net

income per product line.

c$.$ Allocate all S&D expenses by using the advertising and marketing budget for advertising and

marketing costs, the demand for these resources by product for distribution and administration costs,

and commissions for selling costs. Calculate the net income per product line.

Note:

Use this general scheme for calculating net income:

Revenue

Manufacturing$\_$costs

$=$ Gross Margin

Selling and distribution $($S&D$)$ expenses

$=$ Netincome

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