Medford Stores, a retailer in a shopping mall, prepared the following income statement for its operations for the month just ended:

Sales commissions were 5% of sales. Income taxes were 30% of income before income taxes. Both should continue at the same rate for the remainder of the year. Medford Stores is preparing the budget for the month of May 2019. If no basic changes are made, Medford's management expects that the income statement would be virtually identical to the one for April. However, Medford's management has decided to make some changes in the operations. The plans include the following: 

1. Increase advertising expense by 20%. 

2. Decrease all selling prices by 10%. 

3. Increase the number of units sold by 25% as a result of the first two changes. 

Required

a. Prepare a budgeted income statement for the month of May 2019. (Round all amounts on the income statement to the nearest dollar.)

b. Should Medford's management make the planned changes?

Transcribed Image Text:

Sales.. Cost of goods sold Gross profit... Operating expenses: Sales commissions expense. MEDFORD STORES Income Statement for the Month Ended April 30, 2019 $700,000 330,000 $370,000 $35,000 Advertising expense. 90,000 Lease expense... 50,000 Depreciation expense. 20,000 Salaries expense 40,000 Other operating expenses. 25,000 260,000 Income before income taxes Income tax expense Net income. $110,000 33,000 $ 77,000