Gambrell Company prepared the following budgeted income statement for the first quarter of 2018:

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 Gambrell choose? Explain your reasoning.

Option 1 is to increase advertising by$1,300 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%.

Gambrell Company

Budgeted Income Statement

For the Quarter Ended March 31, 2018

January February March Total

Net Sales Revenue (20% increase per month) $8,000 $9,600 $11,520 $29,120

Cost of Goods Sold (40% of sales) 3,200 3,840 4,608 11,648

Gross Profit 4,800 5,760 6,912 17,472

S and A Expenses ($2,000 + 10% of sales) 2,800 2,960 3,152 8,912

Operating Income 2,000 2,800 3,760 8,560

Income Tax Expense (30% of operating income) 600 840 1,128 2,568

Net Income $1,400 $1,960 $2,632 $5,992