Bill Hildebrand and Melissa Nordhaus opened Party-Time T-Shirts to sell T-shirts for parties at their college. The company completed the first year of operations, and the owners are generally pleased with operating results, as shown by the following income statement:

Party time t shirts

Income statement

Net sales revenue. $350,000

Cost of goods sold. 210, 000

Gross margin. 140, 000

Operating expense

Selling expense. 40,000

General expense. 25,000

Net income. 75,000

Hildebrand and Nordhaus are considering how to expand the business. They each propose a way to increase profits to $100,000 during 2012.

a. Hildebrand believes they should advertise more heavily. He believes additional advertising costing $20,000 will increase net sales by 30% and leave general expense unchanged.

b. Nordhaus proposes selling higher-margin merchandise, such as party dresses. An importer can supply a minimum of 1,000 dresses for $40 each; Party-Time can mark

these dresses up 100% and sell them for $80. Nordhaus realizes they will have to advertise the new merchandise, and this advertising will cost $5,000. Party-Time can expect to

sell only 80% of these dresses during the coming year.

Requirement

R1. Help Hildebrand and Nordhaus determine which plan to pursue. Prepare a single-step income statement for 2012 to show the expected net income under each plan.