Problem 7-3A (Algo) Manufacturing: Preparation and analysis of budgeted income statements LO P3 Merline Manufacturing makes its product for $65 per unit and sells it for $137 per unit. The sales staff receives a commission of 10% of sales. Its December income statement follows. MERLINE MANUFACTURING Income Statement Sales Cost of goods sold Gross profit For Month Ended December 31 $ 1,370,000 650,000 720,000 Selling, general, and administrative expenses Sales commissions (10%) Advertising Office rent Administrative salaries Depreciation-Office equipment Office Insurance $ 137,000 214,000 24,700 43,500 53,500 12,700 485,400 $ 234,600 Net income Management expects December's 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 $122 per unit and advertising is increased to $246,100 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 $65 per unit, the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the same.