Luker Company prepared the following budgeted income statement for the first quarer of 2016:

Luker Company
Budgeted Income Statement
For the Quarter Ended March 31, 2016
			January	February	March	Total
Sales Revenue		(20% increase per month)	$10,000	$12,000	$14,400	$36,400
Cost of Goods Sold		(50% of sales)	5,000	6,000	7,200	18,200
Gross Profit			5,000	6,000	7,200	18,200
S and A Expenses		($3,000 + 5% of sales)	3,500	3,600	3,720	10,820
Operating Income			1,500	2,400	3,480	7,380
Income Tax Expense		(30% of operating income)	450	720	1,044	2,214
Net Income			$1,050	$1,680	$2,436	$5,166

Lurker is considering two options. Option 1 is to increase advertising by $1100 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 55% but will provide a better product at the same sales price. The marketing manager projects either option will result in sales increases of 25% per month rather than 20%.

1. Prepare budgeted income statements for both options assuming January sales remain $10,000.

2. Which option should Lurker choose? Explain your reasoning.

Luker Company
Budgeted Income Statement
For the Quarter Ended March 31, 2016
		January	February	March	Total
Sales Revenue		$10,000	$12,500
Cost of Goods Sold		5,000	6,250
Gross Profit		5,000	6,250
S and A Expenses		4,600	4,725
Operating Income		400	1,525
Income Tax Expense		120	458
Net Income		$280	$1,067