Question

Merline Manufacturing makes its product for $65 per unit and sells it for $143 per unit. The sales staff receives a 10% commission on the sale of each unit. Its December income statement follows.

MERLINE MANUFACTURING Income Statement For Month Ended December 31, 2017
Sales	$	1,430,000
Cost of goods sold		650,000
Gross profit		780,000
Operating expenses
Sales commissions (10%)		143,000
Advertising		226,000
Store rent		25,300
Administrative salaries		46,500
Depreciation—Office equipment		56,500
Other expenses		13,300
Total expenses		510,600
Net income	$	269,400

Management expects December’s results to be repeated in January, February, and March of 2018 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 $128 per unit and advertising expenses are increased by 20% and remain at that level for all three months. The cost of its product will remain at $65 per unit, the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the same.

Required:
Prepare budgeted income statements for each of the months of January, February, and March that show the expected results from implementing the proposed changes. (Enter your final answers in whole dollars.)

Answer 1

SOLUTION

Budgeted sales

Particulars	January	February	March
Budgeted sales (in units)	(10000*1.10)=11,000	(11000*1.10) = 12,100	(12100*1.10) = 13,310
Budgeted selling price per unit	$128	$128	$128
Budgeted sales (in dollars)	1,408,000	1,548,800	1,703,680

Budgeted Income Statement

Particulars	January	February	March
Sales	1,408,000	1,548,800	1,703,680
Cost of goods sold(units*$65)	715,000	786,500	865,150
Gross profit	693,000	762,300	838,530
Expenses:
Sales commissions (10% of sales)	140,800	154,880	170,368
Advertising (226,000*1.20)	271,200	271,200	271,200
Store rent	25,300	25,300	25,300
Administrative salaries	46,500	46,500	46,500
Depreciation-Office equipment	56,500	56,500	56,500
Other expenses	13,300	13,300	13,300
Total expenses	553,600	567,680	583,168
Net income	139,400	194,620	255,362