Holly Company prepared the following budgeted income statement for the first quarter of 2018:
HOLLY COMPANY
Budgeted Income Statement
For the Quarter Ended March 31, 2018

Holly Company is considering two options. Option 1 is to increase advertising by $700 per month. Option 2 is to use better-quality materials in the manufacturing process. The better materials will increase the cost of goods sold to 45% but will provide a better product at the same sales price. The marketing manager projects either option will result in sales increases of 30% per month rather than 20%.
Requirements
1. Prepare budgeted income statements for both options, assuming both options begin in January and January sales remain $8,000. Round all calculations to the nearest dollar.
2. Which option should Holly choose? Explain your reasoning?

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February $ 9,600 3,840 5,760 2,960 2,800 Total March January $ 8,000 3,200 4,800 2,800 2,000 (20% increase per month) S 29,120 11,648 17,472 8,912 8,560 2,568 Net Sales Revenue S 11,520 4,608 6,912 3,152 3,760 Cost of Goods Sold (40% of sales) Gross Profit S&A Expenses Operating Income Income Tax Expense (30% of operating income) Net Income ($2,000 + 10% of sales) 600 840 1,128 $ 1,400 $ 2,632 $ 1,960 $ 5,992