MyAccoutingLab Question: P22A-43A

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