Spin Cycle Company is a manufacturer of commercial grade exercise bikes that are sold to hotels and health clubs. Maintaining the bikes is an important area of customer satisfaction. Because of increased industry competition, Spin Cycle’s financial performance has suffered. However, the introduction of a new model and a predicted upturn in the economy are leading Spin Cycle’s managers to predict improved performance in 2021. The following income statement shows results for 2020:

Spin Cycle’s management team is preparing the 2021 budget and is studying the following information:
1. Selling prices of bikes are expected to increase by 15% due to the introduction of the new model. The selling price of each maintenance contract is expected to remain unchanged from 2020.
2. Bike sales in units are expected to increase by 10%, with a corresponding 10% growth in units of maintenance contracts.
3. Cost of each unit sold is expected to increase by 8% to pay for the necessary technology and quality improvements for the new model.
4. Marketing costs are expected to increase by $200,000.
5. Distribution costs vary in proportion to the number of bikes sold.
6. One additional maintenance technician is to be hired at a total cost of $60,000, which covers wages and related travel costs. The objective is to improve customer service and shorten response time.
7. There are no anticipated changes to administration costs.
8. There is no beginning or ending inventory of equipment.

Required

1. Prepare a budgeted income statement for the year ending December 31, 2021.
2. How well does the budget align with Spin Cycle’s strategy?
3. How does preparing the budget help Spin Cycle’s management team better manage the company?

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Spin Cycle Company Income Statement for the Year Ended December 31, 2020 (in Thousands) Revenues Equipment Maintenance contracts Total revenues Cost of goods sold Gross margin Operating costs Marketing Distribution Customer maintenance Administration Total operating costs Operating income $12,000 4,000 800 200 300 900 $16,000 10,000 6,000 2,200 $ 3,800