Select your language

Suggested languages for you:
Log In Start studying!
Answers without the blur. Just sign up for free and you're in → Illustration

55PGB

Expert-verified
Horngren'S Financial And Managerial Accounting
Found in: Page 1260

Short Answer

Using sensitivity analysis Holly Company prepared the following budgeted income statement for the first quarter of 2018:

Holly Company is considering two options. Option 1 is to increase advertising by $700 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 45% but will provide a better product at the same sales price. The marketing manager projects either option will result in sales increases of 30% per month rather than 20%.

Requirements

1. Prepare budgeted income statements for both options, assuming both options begin in January and January sales remain $8,000. Round all calculations to the nearest dollar.

2. Which option should Holly choose? Explain your reasoning.

Holly should choose option 1.

See the step by step solution

Step by Step Solution

Step 1: Preparation of budget under both options 

Option 1:

HOLLY COMPANY

Budgeted Income Statement

For the quarter ended March 31, 2018

January

February

March

Total

Net sales revenue (30% increase per month)

$8,000

$10,400

$13,520

$31,920

Cost of Goods Sold (40% of sales)

3,200

3,840

4,608

11,648

Gross profit

4,800

6,560

8,912

20,272

S&A Expenses ($2,700 + 10% of sales)

3,500

3,740

4,052

11,292

Operating income

1,300

2,820

4,860

8,980

Income Tax Expense (30% of operating income)

390

846

1,458

2,694

Net Income

$910

$1,974

$3,402

$6,286

Step 2: Preparation of budget under both options 

Option 2:

HOLLY COMPANY

Budgeted Income Statement

For the quarter ended March 31, 2018

January

February

March

Total

Net sales revenue (30% increase per month)

$8,000

$10,400

$13,520

$31,920

Cost of Goods Sold (45% of sales)

3,600

4,680

6,084

14,364

Gross profit

4,400

5,720

7,436

17,556

S&A Expenses ($2,000 + 10% of sales)

2,800

2,960

3,152

8,912

Operating income

1,600

2,760

4,284

8,644

Income Tax Expense (30% of operating income)

480

828

1285

2,593

Net Income

$1,120

$1,932

$2,999

$6,051

Step3: Sensitivity Analysis

Holly should choose option 1 because under option 1 the company will earn $6,286.

Most popular questions for Business-studies Textbooks

Completing a comprehensive budgeting problem—merchandising company Alliance Printing Supply of Baltimore has applied for a loan. Its bank has requested a budgeted income statement for April 2018 and a balance sheet at April 30, 2018. The March 31, 2018, balance sheet follows:

As Alliance Printing Supply’s controller, you have assembled the following additional information:

a. April dividends of $7,000 were declared and paid.

b. April capital expenditures of $16,300 budgeted for cash purchase of equipment.

c. April depreciation expense, $1,000.

d. Cost of goods sold, 40% of sales.

e. Desired ending inventory for April is $22,400.

f. April selling and administrative expenses include salaries of $37,000, 30% of which will be paid in cash and the remainder paid next month.

g. Additional April selling and administrative expenses also include miscellaneous expenses of 10% of sales, all paid in April.

h. April budgeted sales, $89,000, 80% collected in April and 20% in May.

i. April cash payments of March 31 liabilities incurred for March purchases of inventory, $8,600.

j. April purchases of inventory, $8,600 for cash and $37,400 on account. Half the credit purchases will be paid in April and half in May.

Requirements

1. Prepare the sales budget for April.

2. Prepare the inventory, purchases, and cost of goods sold budget for April.

3. Prepare the selling and administrative expense budget for April.

4. Prepare the schedule of cash receipts from customers for April.

5. Prepare the schedule of cash payments for selling and administrative expenses for April.

6. Prepare the cash budget for April. Assume the company does not use short-term financing to maintain a minimum cash balance.

7. Prepare the budgeted income statement for April.

8. Prepare the budgeted balance sheet at April 30, 2018.

Icon

Want to see more solutions like these?

Sign up for free to discover our expert answers
Get Started - It’s free

Recommended explanations on Business-studies Textbooks

94% of StudySmarter users get better grades.

Sign up for free
94% of StudySmarter users get better grades.