P22-55B Using sensitivity analysis

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

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 Holly choose? Explain your reasoning.

22-55B Using sensitivity analysis Holly Company prepared the following budgeted income statement for the first quarter of 2018 : Holly Company is considering two options. Option 1 is to increase advertising by $700 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%. 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 Holly choose? Explain your reasoning. P22-55B Option 1 Holly Company Pro Forma Income Statement Quarter Ended March 31, 2018 \begin{tabular}{l|l|l|l} January & February & March & Total \\ \hline \end{tabular} Sales Revenue Cost of Goods Sold Gross Profit S \& A Expenses Operating Income Income Tax Expense Net Income Option 2 Holly Company \begin{tabular}{|l|c|c|c|c|} \hline \multicolumn{3}{|c|}{ Pro Forma Income Statement } \\ \multicolumn{3}{|c|}{ Quarter Ended March 31, 2018 } \\ \hline & January & \multicolumn{1}{|c|}{ February } & March & Total \\ \hline & & & & \\ \hline Sales Revenue & & & & \\ \hline Cost of Goods Sold & & & & \\ \hline Gross Profit & & & & \\ \hline S \& A Expenses & & & & \\ \hline Operating Income & & & & \\ \hline Income Tax Expense & & & & \\ \hline Net Income & & & & \\ \hline \end{tabular}