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Preparing a Budgeted Income Statement

Budgeted Income Statement

Easecom Company is a manufacturer of video-conferencing products. Regular units are manufactured to meet marketing projections, and specialized units are made after an order is received. Maintaining the video-conferencing equipment is an important area of customer satisfaction. With the recent downturn in the computer industry, the video-conferencing equipment segment has suffered, leading to a decline in Easecom's financial performance. The following income statement shows results for 2010.

Easecom Company
Income Statement
For the year ended December 31,2010 (in thousands)

Revenues
Equipment $6,000
Maintenance contracts $1,800
Total Revenues $7,800

Cost of Goods Sold $4,600
Gross Margin $3,200

Operating Costs
Marketing $600
Distribution $150
Customer Maintenance $1,000
Administration $900
Total Operating Costs $2,650

Operating Income $550

Easecom's management team is in the process of preparing the 2011 budget and is studying the following information:

1. Selling prices of equipment are expected to increase by 10% as the economic recovery begins. The selling price of each maintenance contract is expected to remain unchanged from 2010.
2. Equipment sales in units are expected to increase by 6%, with a corresponding 6% growth in units of maintenance contracts.
3. Cost of each unit sold is expected to increase by 3% to pay for the necessary technology and quality improvements.
4. Marketing costs are expected to increase by $250,000, but administration costs are expected to remain at 2010 levels.
5. Distribution costs vary in proportion to the number of units of equipment sold.
6. Two maintenance technicians are to be hired at a total cost of $130,000, which covers wages and related travel costs. The objective is to improve customer service and shorten response time.
7. There is no beginning or ending inventory of equipment.

Prepare a budgeted income statement for the year ending December 31, 2011.

Solution Summary

This solution illustrates how to adjust current period results for expected results and how to prepare a budgeted income statement from those computations.

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