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 $30$

Sales $$1,250,000$

Cost of goods sold $600,000$

Gross profit $650,000$

Operating expenses:

Sales commissions expense $$125,000$

Advertising expense $150,000$

Lease expense $50,000$

Depreciation expense $25,000$

Salaries expense $75,000$

Other operating expenses $37,500462,500$

Income before income taxes $187,500$

Income tax expense $65,625$

Net income $$121,875$

Sales commissions were $10\%$ of sales. Income taxes were $35\%$ 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. If no basic changes are made, Fairfield$$s management expects that the income statement would be virtually identical to the one for April. However, Fairfield$$s management has decided to make some changes in the operations. The plans include the following:

$1.$ Increase advertising expense by $35\%.$

$2.$ Decrease all selling prices by $5\%.$

$3.$ Increase the number of units sold by $20\%$ as a result of the first two changes.

a$.$ Prepare a budgeted income statement for the month of May. Round all amounts on the

income statement to the nearest dollar.

FAIRFIELD STORES

Budgeted Income Statement

For the Month Ended May $31$

Sales

Cost of Goods Sold

Gross Profit

Operating Expenses:

Sales Commission Expense

Advertising Expense

Lease Expense

Depreciation Expense

Salaries Expense

Other Operating Expenses

Income $($Loss$)$ before Income Taxes

Income Tax Expense

Net Income $($Loss$)$

b$.$ Complete the following statement:

Fairfield$$s management Answer make the planned changes because the changes would result in a $Answer Answer in net income.