Holly Company prepared the following budgeted income statement for the first quarter of 2016:

Holly Company is considering two options. Option 1 is to increase advertising by $ 1,000 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 65% but will provide a better product at the same sales price. The marketing manager projects either option will result in sales increases of 20% per month rather than 10%.

Requirements

1. Prepare budgeted income statements for both options, assuming January sales remain $ 10,000.

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

Transcribed Image Text:

HOLLY COMPANY Budgeted Income Statement For the Quarter Ended March 31, 2016 January FebruaryMarch o | $10,000 | $11,000 | $ 12,100 | Sales Revenue Cost of Goods Sold Gross Profit S&A Expenses Operating Income Income Tax Expense Net Income (10% increase per month) (60% of sales) $33,100 | 19860 4,840 13,240 2,000 2,1002,2106310 2,0002,300 2,630 6,930 789 2,079 S 1,400 1,610 1,84 $ 4,851 6,000 4,000 6,600 7,260 4,400 1,000 + 10% of sales) (30% of operating income) 600 690