Merline, a one-product mail-order firm, buys its product for $75 per unit and sells it for $150 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 2014 without any changes in strategy. Management, however, has an alternative plan. It believes that unit sales will in¬ crease at a rate of 10% each month for the next three months (beginning with January) if the item’s selling price is reduced to $125 per unit and advertising expenses are increased by 15% and remain at that level for all three months. The cost of its product will remain at $75 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

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MERLINE COMPANY Income Statement For Month Ended December 31, 2013 Sales... $2,250,000 Cost of goods sold 1,125,000 Gross profit... 1,125,000 Expenses Sales commissions (10%) 225,000 Advertising 250,000 Store rent... 30,000 Administrative salaries .... 45,000 Depreciation.... 50,000 Other expenses 10,000 Total expenses 610,000 Net income $ 515,000