Avery is considering two options. Option 1 is to increase advertising by $ 800 p

Question

Avery is considering two options. Option 1 is to increase advertising by $ 800 per month. Option 2 is to use? better-quality materials in the manufacturing process. The better materials will increase the cost of goods sold to 15?% but will provide a better product at the same sales price. The marketing manager projects either option will result in sales increases of 25?% per month rather than 20?%.

Avery Company prepared the following budgeted income statement for the first quarter of 2016 ?(Click the icon to view the budgeted income statement.) Avery is considering two options. Option 1 is to increase advertising by $800 per month. Option 2 is to use better-quality materials in the manufacturing process. The better materials will increase the cost of goods sold to 15% but will provide a better product at the same sales price. The marketing manager projects either option will result in sales increases of 25% per month rather than 20%. Read the requirements. Requirement 1. Prepare budgeted income statements for both options assuming January sales remain $5,000 Begin by preparing the budgeted income statement for Option 1. (Round all amounts to the nearest whole number.) Avery Company Budgeted Income Statement For the Quarter Ended March 31, 2016 January Data Table Sales Revenue Cost of Goods Sold Gross Profit S and A Expenses Operating Income Income Tax Expense Net Income Avery Company Budgeted Income Statement For the Quarter Ended March 31, 2016 January February March Total (20% increase per month) (10% of sales) 5,000 $ 500 4,500 3,000 1,500 450 1,050 $ 6,000 $ 600 5,400 3,100 2,300 690 1,610 $ 7,200 $ 720 6,480 3,220 3,260 978 2,282 S 18,200 1,820 16,380 9,320 7,060 2,118 4,942 $ Sales Revenue Cost of Goods Sold Gross Profit S and A Expenses Operating Income Income Tax Expense Net Income ($2,500 + 10% of sales) (30% of operating income) Print Done

Explanation / Answer

Option 1 Avery Company Budgeted Income Statement For the Quarter ended March 31,2016 January February March Total Sales Revenue [25% increase per month] $5,000.00 $6,250.00 $7,812.50 $19,062.50 Cost of good sold (10% of sales) $500.00 $625.00 $781.25 $1,906.25 Gross Profit $4,500.00 $5,625.00 $7,031.25 $17,156.25 S and A Expenses [$3300 + 10% of sales] $3,800.00 $3,925.00 $4,081.25 $11,806.25 Operating Income $700.00 $1,700.00 $2,950.00 $5,350.00 Income Tax expense (30% of operating Income) $210.00 $510.00 $885.00 $1,605.00 Net Income $490.00 $1,190.00 $2,065.00 $3,745.00 Option 2 Avery Company Budgeted Income Statement For the Quarter ended March 31,2016 January February March Total Sales Revenue [25% increase per month] $5,000.00 $6,250.00 $7,812.50 $19,062.50 Cost of good sold (15% of sales) $750.00 $937.50 $1,171.88 $2,859.38 Gross Profit $4,250.00 $5,312.50 $6,640.63 $16,203.13 S and A Expenses [$2500 + 10% of sales] $3,000.00 $3,125.00 $3,281.25 $9,406.25 Operating Income $1,250.00 $2,187.50 $3,359.38 $6,796.88 Income Tax expense (30% of operating Income) $375.00 $656.25 $1,007.81 $2,039.06 Net Income $875.00 $1,531.25 $2,351.56 $4,757.81

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