Tech-Media buys its product for $90 and sells it for $200 per unit. The sales staff receives a 12% commission on the sale of each unit. Its June income statement follows.

TECH-MEDIA COMPANY

Income Statement

For Month Ended June 30, 2009

Sales . . . . . . . . . . . . . . . . . . . . . . . .$2,000,000

Cost of goods sold . . . . . . . . . . . . . 900,000

Gross profit . . . . . . . . . . . . . . . . . . 1,100,000

Expenses

Sales commissions (12%) . . . . . . . 240,000

Advertising . . . . . . . . . . . . . . . . . 225,000

Store rent . . . . . . . . . . . . . . . . . . 32,000

Administrative salaries . . . . . . . . . 75,000

Depreciation . . . . . . . . . . . . . . . . 80,000

Other expenses . . . . . . . . . . . . . . 25,000

Total expenses . . . . . . . . . . . . . . . 677,000

Net income . . . . . . . . . . . . . . . . . . . $ 423,000

Management expects June’s results to be repeated in July, August, and September without any changes in strategy. Management, however, has another plan. It believes that unit sales will increase at a rate of 10% each month for the next three months (beginning with July) if the item’s selling price is reduced to $180 per unit and advertising expenses are increased by 20% and remain at that level for all three months. The cost of its product will remain at $90 per unit, the sales staff will continue to earn a 12% commission, and the remaining expenses will stay the same.

Required

1. Prepare budgeted income statements for each of the months of July, August, and September 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 plan. Explain.