Question

Merline Manufacturing makes its product for $70 per unit and sells it for $132 per unit. The sales staff receives a 10% commission on the sale of each unit. Its December income statement follows.

MERLINE MANUFACTURING Income Statement For Month Ended December 31, 2019
Sales	$	1,320,000
Cost of goods sold		700,000
Gross profit		620,000
Operating expenses
Sales commissions (10%)		132,000
Advertising		204,000
Store rent		24,200
Administrative salaries		41,000
Depreciation—Office equipment		51,000
Other expenses		12,200
Total expenses		464,400
Net income	$	155,600

Management expects December’s results to be repeated in January, February, and March of 2020 without any changes in strategy. Management, however, has an alternative plan. It believes that unit sales will increase at a rate of 10% each month for the next three months (beginning with January) if the item's selling price is reduced to $117 per unit and advertising expenses are increased by 15% and remain at that level for all three months. The cost of its product will remain at $70 per unit, the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the same.

Required:
1. Prepare budgeted income statements for each of the months of January, February, and March that show the expected results from implementing the proposed changes.

Answer 1