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

Ivey 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 55% 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 Ivey choose? Explain your reasoning.

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IVEY COMPANY Budgeted Income Statement For the Quarter Ended March 31, 2016 January February March Total Sales Revenue (10% increase per month) $ 10,000 $ 11,000 $ 12,100 $ 33,100 Cost of Goods Sold (50% of sales) 5,000 5,500 6,050 16,550 Gross Profit 5,000 5,500 6,050 16,550 S&A Expenses (32,000 + 10% of sales) 3,000 3,100 3,210 9,310 Operating Income 2,000 2,400 2,840 7,240 Income Tax Expense (30% of operating income) 600 720 852 2,172 Net Income $ 1,400 S 1,680 $ 1,988 $ 5,068