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 45% 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%.
1. Prepare budget income statements for both options assuming January sales remain $8,000.
2. Which option should Avery choose? Explain your reasoning.
Budgeted Income Statement
Jan. Feb. March Total
Sales Revenue (20% increase) 8000 9600 11520 29120
Cost of Goods Sold (40% of sales) 3200 3840 4608 11648
Gross Profit 4800 5760 6912 17472
S and A (2,000 + 10% of sales) 2800 2960 3152 8912
Operating Income 2000 2800 3760 8560
Income Tax Expense (30% of Operating) 600 840 1128 2568
Net Income 1400 1960 2362 5992