Prepare and Evaluate Budgeted Income Statement Fairfield Stores, a retailer in a shopping mall, prepared the following income statement for its operations for the month just ended

FAIRFIELD STORES

Income Statement

for the Month Ended April 30, 2016

Sales............................................................$500,000

Cost of goods sold.................................................240,000

Gross profit.......................................................$260,000

Operating expenses:

Sales commissions expense .......................................$25,000

Advertising expense ..............................................60,000

Lease expense ..................................................20,000

Depreciation expense.............................................10,000

Salaries expense.................................................30,000

Other operating expenses .........................................15,000 160,000

Income before income taxes .........................................$100,000

Income tax expense ................................................ 30,000

Net income .......................................................$ 70,000

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.

Fairfield Stores is preparing the budget for the month of May 2016. If no basic changes are made,

Fairfield management expects that the income statement would be virtually identical to the one for

April. However, Fairfields management has decided to make some changes in the operations. The

plans include the following:

1. Increase advertising expense by 40%.

2. Decrease all selling prices by 10%.

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

Required

a. Prepare a budgeted income statement for the month of May 2016. (Round all amounts on the income statement to the nearest dollar.)

b. Should Fairfields management make the planned changes?