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

Merline Manufacturing makes its product for $65 per unit and sells it for $131 per unit. The sales staff receives a 10% commission on the sale of each unit. Its December income statement follows.

MERLINE MANUFACTURING Income Statement For Month Ended December 31, 2019
Sales	$	1,310,000
Cost of goods sold		650,000
Gross profit		660,000
Operating expenses
Sales commissions (10%)		131,000
Advertising		202,000
Store rent		24,100
Administrative salaries		40,500
DepreciationOffice equipment		50,500
Other expenses		12,100
Total expenses		460,200
Net income	$	199,800

Management expects Decembers results to be repeated in January, February, and March of 2020 without any changes in strategy. Management, however, has an alternative plan. It believes that unit sales will increase at a rate of 10% each month for the next three months (beginning with January) if the item's selling price is reduced to $116 per unit and advertising expenses are increased by 10% and remain at that level for all three months. The cost of its product will remain at $65 per unit, the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the same. Required: 1. Prepare budgeted income statements for each of the months of January, February, and March that show the expected results from implementing the proposed changes. 2. Is net income for March expected to increase with the proposed strategy changes?

MERLINE MANUFACTURING
Budgeted Sales
For Months of January, February, and March, 2020
	January	February	March
Budgeted sales (in units)
Budgeted selling price per unit
Budgeted sales (in dollars)
MERLINE MANUFACTURING
Budgeted Income Statement
For Months of January, February, and March, 2020
	January	February	March
Sales
Cost of goods sold
Gross profit
Expenses
Sales commissions
Advertising
Store rent
Administrative salaries
DepreciationOffice equipment
Other expenses
Total expenses	0	0	0
Net income	$0	$0	$0