Solved: Lilliput a one product mail order firm buys its

product for 6
Lilliput a one product mail order firm buys its product for 6

Lilliput, a one-product mail-order firm, buys its product for $60 per unit and sells it for $130 per
unit. The sales staff receives a 10% commission on the sale of each unit. Its December income
statement follows.

Management expects December’s results to be repeated in January, February, and March of

2012 without any changes in strategy. Management, however, has an alternative plan. It
believes that unit sales will increase at a rate of 10% each month for the next three months
(beginning with January) if the item’s selling price is reduced to $115 per unit and advertising
expenses are increased by 25% and remain at that level for all three months. The cost of its
product will remain at $60 per unit, the sales staff will continue to earn a 10% commission, and
the remaining expenses will stay the same.

Required
1. Prepare budgeted income statements for each of the months of January, February, and
March that show the expected results from implementing the proposed changes. Use a three-
column format, with one column for each month.
Analysis Component
2. Use the budgeted income statements from part 1 to recommend whether management
should implement the proposed changes.Explain.

Lilliput a one product mail order firm buys its product for 6

ANSWER
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