Merline Manufacturing makes its product for $75 per unit and sells it for $150 per unit. The sales staff receives a 10% commission on the sale of each unit. Its December income statement follows.
MERLINE MANUFACTURING
Income Statement
For Month Ended December 31, 2015
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,250,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . 1,125,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,125,000
Operating expenses
Sales commissions (10%) . . . . . . . . . . . . . . . . . 225,000
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000
Store rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Administrative salaries . . . . . . . . . . . . . . . . . . . 45,000
Depreciation—Office equipment . . . . . . . . . . . 50,000
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . 610,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 515,000
Management expects December’s results to be repeated in January, February, and March of 2016 without any changes in strategy. Management, however, has an alternative plan. It believes that unit sales will increase at a rate of 10% each month for the next three months (beginning with January) if the item’s selling price is reduced to $125 per unit and advertising expenses are increased by 15% and remain at that level for all three months. The cost of its product will remain at $75 per unit, the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the same.
Required
1. Prepare budgeted income statements for each of the months of January, February, and March that show the expected results from implementing the proposed changes. Use a three-column format, with one column for each month.
Analysis Component
2. Use the budgeted income statements from part 1 to recommend whether management should implement the proposed changes. Explain.