P22-55b managerial accounting chapter 22

P22-55B Using sensitivity analysis Holly Company prepared the following budgeted income statement for the first quarter of 2018: HOLLY COMPANY Budgeted Income Statement For the Quarter Ended March 31, 2018 January February March Total Net Sales Revenue (20% increase per month) $ 8,000 $ 9,600 $ 11,520 $ 29, 120 Cost of Goods Sold (40% of sales) 3,200 3,840 4,608 11,648 Gross Profit 4,800 5,760 6,912 17,472 S&A Expenses ($2,000 + 10% of sales) 2,800 2,960 3,152 8,912 Operating Income 2,000 2,800 3,760 8,560 Income Tax Expense (30% of operating income) 600 840 1, 128 2,568 Net Income $ 1,400 $ 1,960 $ 2,632 $ 5,992 Holly Company is considering two options. Option 1 is to increase advertising by $700 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 30% per month rather than 20%. Requirements 1. Prepare budgeted income statements for both options, assuming both options begin in January and January sales remain $8,000. Round all calculations to the nearest dollar. 2. Which option should Holly choose? Explain your reasoning