Problem 22-3A (Algo) Manufacturing: Preparation and analysis of budgeted income statements LO P3

Merline Manufacturing makes its product for $50 per unit and sells it for $140 per unit. The sales staff receives a commission of 10% of sales. Its December income statement follows.

MERLINE MANUFACTURING
Income Statement
For Month Ended December 31
Sales		$ 1,400,000
Cost of goods sold		500,000
Gross profit		900,000
Selling, general, and administrative expenses
Sales commissions (10%)	$ 140,000
Advertising	220,000
Office rent	25,000
Administrative salaries	45,000
DepreciationOffice equipment	55,000
Office Insurance	13,000	498,000
Net income		$ 402,000

Management expects Decembers results to be repeated in January, February, and March without any changes in strategy. Management, however, has an alternative plan. It believes that if the unit selling price is reduced to $125 per unit and advertising is increased to $275,000 per month, sales units will be 11,000 for January, 12,100 for February, and 13,310 for March. The cost of its product will remain at $50 per unit, the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the same.

Required:

Prepare budgeted income statements for each of the months of January, February, and March that show results from implementing the proposed plan.

For the proposed plan, is income in March budgeted to be higher than income in December?

MERLINE MANUFACTURING
Budgeted Sales
	January	February	March
Budgeted sales (in units)
Budgeted selling price per unit
Budgeted sales (in dollars)
MERLINE MANUFACTURING
Budgeted Income Statement
	January	February	March
Sales
Cost of goods sold
Gross profit
Selling, general, and administrative expenses
Sales commissions
Advertising
Office rent
Administrative salaries
DepreciationOffice equipment
Office insurance
Total expenses	0	0	0
Net income	$ 0	$ 0	$ 0